Problem B.4 (Static) Present Value and Bond Prices (LOB-3, LOB-5,

LOB-6)

On June 30 of the current year, Blue Ridge Power issued bonds with a $40,000,000 face value and

an annual coupon rate of 8 percent. The bonds mature in 10 years and pay semiannual interest on

December 31 and June 30. They were issued when the annual market interest rate for bonds of

similar type and risk was 10%. Use Table PV-1 and Table PV-2.

Required:

a. Compute the issue price for the bond that results in an effective annual interest rate of 10 percent.

(Hint: Discount both the interest payments and the maturity value over 20 semiannual periods at 5

percent.)

b. Prepare a journal entry to record the issuance of the bonds at the sales price you computed in

part a.

Present value of future principal payment:

$40,000,000 due after 20 semiannual periods, discounted at 5% per period: $40,000,000 0.377 (from

Table PV-1)$15,080,000.

Present value of future interest payments:

$1,800,000 interest payments ($40,000,000 9% 1/2) for 20 periods, discounted at 5% per period:

($1,800,000 12.462 (from Table PV-2) 22,431,600

Issuance price resulting in an effective annual interest rate of 10% (or 5% semiannually).$37,511,600