Postby deepakkrkanodia » Fri Feb 08, 2013 10:22 am
Q1. A firm issues a $10 million bond with a 6% coupon rate, 4 year maturity, and annual interest payments when market interest rates are 7%.
If the market rate changes to 8% and the bonds are carried at amortized cost, the book value of the bonds at the end of the first year will be:
A. $9,484,581.
B. $9,661,279.
C. $9,737,568.
Query: why the answer is C and not A, please see below as I have calculated this on both 7% and 8% but schweser had taken ending bond liability value of 7% and not of 8%, please tell the reason
Calculation on 7%
pmt =600000
n=4
i/y =7% coupon rate-=6%
fv=10000000
pv $9,661,278.87
beginning liability interest exp coupon discount ending liability
1 $9661278.87, $676289.52, $600000, $76290, $9737,568.40
2 $9737568.40, $681629.79, $600000, $81630, $9819198.18
3 $9819198.18, $687343.87, $600000, $87344, $9906542.06
4 $9906542.06, $693457.94, $600000, $93458, $10000000.00
Calculation on 8%
pmt=600000
n=4
i/y = 8% coupon rate=6%
fv=10000000
pv $9,337,574.63
beginning liability interest exp coupon discount ending bond liability
1 $9337574.63, $747005.97, $600000, $147006, $9484580.60
2 $9484580.60, $758766.45, $600000, $158766, $9643347.05
3 $9643347.05, $771467.76, $600000, $171468, $9814814.81
4 $9814814.81, $785185.19, $600000, $185185, $10000000.00
Q2. At the beginning of 20X6, Cougar corporation enters a finance lease requiring five annual payments of $10,000 each beginning on the first day of the lease. Assuming the lease interest rate is 8%, the amount of interest expense recognized by Cougar in 20X6 is closest to:
A. $2,650.
B. $3,194.
C. $3,450.
Query : I have calculated Present value of lease payments as $43121. And now I am calculating 8% interest expense on $43121, according to me answer is coming as $3450,
but the correct answer is $2650 (($43121-10000)*8%). Why the interest is calculated on beginning lease value less principal payments, actually it should be calculated on beginning lease value only and then ending value of lease will be calculated as beginning book value + interest expense – annual payments
Q3. In finance as well as operating lease, at the end of the lease, who is entitled for or who gets the asset actually at the end in both cases.