Question
Potomac Electric Power Company (PEPCO) is planning to issue utility bonds with a face value of $1,000,000 and a coupon rate of 10%. The bonds
Potomac Electric Power Company (PEPCO) is planning to issue utility bonds with a face value of $1,000,000 and a coupon rate of 10%. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1, 2000. PEPCO uses the effective-interest amortization method. Assume an annual market interest rate of 12%.
Required:
1. What is the issue price on January 1, 2000?
2. Prepare PEPCOs bond amortization schedule for 3 years. What amount of interest expense should be recorded on June 30 and December 31, 2000?
3. What amount of cash should be paid to investors June 30 and December 31, 2000?
4. What is the book value of the bond on June 30 and December 31, 2000?
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