51) The owners of The Country Gentleman, a western clothing store, would like to raise money for expansion. They think the business can get a better interest rate by going to the financial markets and selling $100,000 worth of 10-year bonds.
The interest rate for bonds has been fluctuating between 6% and 8%, so they decide to sell the bonds for 7%, which will be paid once a year.
Required:
a. Calculate the price at which the bonds are sold if the market interest rate is 6%.
b. Calculate the price at which the bonds are sold if the market interest rate is 7%.
c. Calculate the price at which the bonds are sold if the market interest rate is 8%.
52) Terry’s Wear issued 15-year bonds with a face value of $50,000. The bonds carry a 7% stated interest rate and pay interest once a year. They were issued when the market interest rate was 8%.
a. Calculate the present value of the bond issue.
b. Were these bonds issued at a premium or at a discount?
c. What is the amount of the premium or discount on the bond issue?
d. Calculate the amount of the amortization of the bond premium or discount for the first year, using the effective interest method.
53) Match each of the following terms with the appropriate definition.
a. discount rate
b. principal
c. long-term liability
d. present value
e. discounting
f. time value of money
______ 1. the concept that the value of money changes as time passes
______ 2. the interest rate used in a present value problem
______ 3. the process of finding the present value in a time value of money problem
______ 4. what money is worth in today’s dollars
______ 5. the amount of money owed or borrowed
______ 6. obligation incurred when a company borrows money for longer than one year