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[answered] BONDS PAYABLE (20 points) Be sure to show your work using a

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BONDS PAYABLE (20 points)

Be sure to show your work using a time line and writing out formula when appropriate

On January 1, 2010, AT&T issued a 3 year bond with a face value of $6,000,000 and a stated interest rate

of 5%. tHE BOND MAKES PAYMENTS SEMI ANNUALLY

a. Indentify the relevant variables:

FV

SR

PMT

N b. If the going rate of interest is 5%, how much cash will AT&T receive when they issue the bond. c. Given the information in part b. create an amortization schedule for the first two years. How

much interest expense would AT&T recognize on the income statement in the first year? Is this

the same or different than the promised annual cash payments? Explain. d. If the going rate of interest is 6%, how much cash will AT&T receive when they issue the bond. e. Given the information in part d. create an amortization schedule for the first two years. How

much interest expense would AT&T recognize the first year they borrowed the money? Is this the

same or different than the promised annual cash payments? Explain. f. In general, why might AT&T want to borrow money? What is the difference between a zero

coupon note, an installment loan, and a bond? Why might a firm choose one debt structure or

another when they borrow money? Why might AT&T issue a bond rather than an installment

loan or a zero coupon note? (4) g. Time Value of Money (20 points)

For each problem: 1) identify whether you need to discount or compound, 2) work with a single sum or

an annuity, 3) write out the appropriate formula, 4) find the solution, and 5) respond to the final analysis

question

TVM #1 Your local savings and loan advertises: ?Save your money with us and we?ll double it in 10 years.?

A. How much will you have at the end of 10 years if you deposit $500 in a savings account at 7% interest?

B. Was the advertisement correct?

FUTURE VALUE OR PRESENT VALUE (circle one) /

PV = ___________________ FV = ___________________ PMT = ___________________ N = ___________________ I = ___________________ LUMP SUM OR ANNUITY (circle one) TVM #2 In order to purchase a new piece of equipment, Parker Brothers can take out a loan that

requires four annual payments of $103,300 with payments made at the end of each of the next four

years. If the interest on the note is 10%, A. How much is the equivalent value today?

B. Alternately, they can pay $350,000 cash today. Should the company pay cash or take out the loan?

FUTURE VALUE OR PRESENT VALUE (circle one) /

PV = ___________________ FV = ___________________ PMT = ___________________ N = ___________________ LUMP SUM OR ANNUITY (circle one) I = ___________________ TVM #3 Starting today Korfen Inc. will save $3,000 annually for the next 3 years to fund a future

replacement of equipment. Korfen can earn 8% on their savings.

A. How much will Korfen have

B. Will Korfen have enough at the end of 3 years if they need $10,000 to replace the equipment?

FUTURE VALUE OR PRESENT VALUE (circle one) /

PV = ___________________ FV = ___________________ PMT = ___________________ N = ___________________ I = ___________________ LUMP SUM OR ANNUITY (circle one) TVM #4 Gresham Inc needs to accumulate $1 million to redeem bonds that are due in 8 years. The

company can earn 5% on their investment.

A. How much should they deposit today? B.

B. If the company deposits $700,000 in the account today, will they have enough?

FUTURE VALUE OR PRESENT VALUE (circle one) /

PV = ___________________ FV = ___________________ LUMP SUM OR ANNUITY (circle one) PMT = ___________________ N = ___________________ I = ___________________

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