Understanding and using bond tables. Exhibit 10.19 presents a bond table for 8%, semiannual bonds for various market yields and years to maturity. The amounts given are percentages of face value.

a. Why are the amounts in the 8.0% market yield column equal to 100% regardless of the number of years to maturity?

b. Why are the amounts in the columns to the left of the 8.0% column greater than 100% and the amounts in the columns to the right of the 8.0% column less than 100% for all years to maturity?

c. Why do the amounts in the columns to the left of the 8.0% column decrease toward 100% and the amounts in the columns to the right of the 8.0% column increase toward 100% as the years to maturity decrease?

Assume for the remaining parts of this problem that a firm issues SI million face value, 8% semiannual coupon bonds on January 1, 2008, at a price to yield 7% compounded semiannually. The firm uses the historical market interest rate to account for these bonds for parts d to f and the fair value option for parts g to i.

d. What are the initial issue proceeds for these bonds if they mature in 25 years?

e. What is the carrying value of these bonds after five years?

f. Use the bond table to compute the amount of interest expense for 2013. Independently verify this amount of interest expense for 2013 by multiplying the historical market interest rate times the liability at the beginning of each six-month period during 2013.

g. At the end of the 15th year, this firm adopts the fair value option. Any difference between the carrying value and the market value of these bonds is an adjustment to retained earnings. If the market interest rate on these bonds at the end of the 15th year is 7.8%, compute the pretax adjustment to retained earnings, and indicate whether the adjustment increases or decreases retained earnings.

h. The market interest rate on June 30, 2023, is 8.3%. Compute the amount of interest expense for the first six months of 2023 and the amount of any unrealized gain or loss for this six-month period. Assume the firm computes interest expense using the market interest rate at the beginning of the six months of 2023 and the amount of any unrealized gain or loss for this six-moth period.

i. the market interest rate on December 31, 2023, is 9.0%. compute the amount of interest expense for the second six months of 2023 and the amount of any unrealized gain or loss for this six-monthperiod.

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Bond Values in Percent of Face Value EXHIBIT 10.19 8% Semiannual Coupon Bonds (Problem 31) Market Yield Percent per Year Compounded Semiannually Years to 8.0 Maturity 7.0 7.8 8.3 6.0 9.0 100.9709 100.4831 100.0962 0.5 100 99.8560 99.5215 1.0 101.9135 100.9498 100.1889 100 99.7177 99.0637 100.2780 1.5 102.8286 101.4008 100 99.5849 98.6255 2.0 103.7171 101.8365 100.3638 100 99.4574 98.2062 2.5 104.5797 102.2575 100.4464 100 99.3350 97.8050 5.0 108.5302 104.1583 100.8151 100 98.7924 96.0436 113.7535 9.0 106.5948 101.2763 100 98.1240 93.9200 9.5 114.3238 106.8549 101.3246 100 98.0548 93.7034 10.0 114.8775 107.1062 101.3711 100 97.9883 93.4960 119.6004 15.0 109.1960 101.7504 100 97.4528 91.8556 110.4205 19.0 122.4925 101.9649 100 97.1564 90.9750 19.5 100 90.8852 122.8082 110.5512 101.9874 97.1257 20.0 110.6775 100 123.1148 102.0091 97.0962 90.7992 125.7298 25.0 111.7278 102.1855 100 96.8588 90.1190 30.0 127.6756 112.4724 102.3059 96.7007 89.6810 100 100 96.5253 40.0 130.2008 113.3744 102.4440 89.2173 *The amounts of the entries of this exhibit result from using the present value function in Excel and then dividing the result by 10,000 to express as a percentage. For example, the computation of the value of 100.9709 in the 6% yield and 0.5 years to maturity is as follows: =-PV(.03,1,40000,1000000,0)/10000.