Lynos Document Storage’s controller, Eric Petro, told Rene that the bonds were issued in 1999 at a discount and that only approximately $9.1 million was received in cash. Explain what is meant by the terms “premium” or “discount” as they relate to bonds. Compute exactly how much the company received from its 8% bonds if the rate prevailing at the time of the original issue was 9% as indicated in Exhibit 2. Also, re-compute the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt. What is the current market value of the bonds outstanding at the current effective interest rate of 6%?

Solution:

Premium Bond:

A bond is a premium bond if its price is greater than its par value. Alternatively, we can say that a bond is premium bond if its coupon rate is greater than the yield to maturity. Discount Bond:

A bond is a discount bond if its price is less than its par value. Alternatively, we can say that a bond is discount bond if its coupon rate is less than the yield to maturity.

Compute exactly how much the company received from its 8% bonds if the rate prevailing at the time of the original issue was 9% as indicated in Exhibit 2.

Face Value = $ 1000000

Coupon Rate = 8%

YTM = 9%

Number of years = 20

Frequency = 2 (semi-annual)

Amount received = $ 9079920.779 (The calculations are shown in the excel sheet)

Also, re-compute the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt. | 2006 | 2007 | YTM = 6 % | 11741314.77 | 11644360.84 | YTM = 9 % | 9258589.552 | 9292611.255 |

(The calculations are shown in the excel sheet)

What is the current market value of the bonds outstanding at the current effective interest rate of 6%?

Face Value = $ 1000000

Coupon Rate = 8%

YTM = 6%

Frequency = 2 (semi-annual)

Current market value = $ 11541502.41 (The calculations are shown in the excel