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Power Solutions Ltd
Power Solutions Ltd. issues a $15,000,000, five-year, 4.5% bond with semi-annual interest payments. Underwriting costs, paid up front,
are $960,000. The bond sells at par.
Required:
1. How much cash does Power receive when the bond is issued?
2. What is the effective interest rate on the bond? (Round your answer to the nearest whole percentage.)
3. Prepare an amortization table using the effective-interest method of amortization. Complete the first four payments only. (Round
your effective interest rate to the nearest whole percentage and your final answers to the nearest whole dollar.)
Expert Solution
Computation of Power Receives:
Power Receives = Sales Value of Bond - Underwriting Costs
= $15,000,000-$960,000
Power Receives = $14,040,000
Computation of Effective Rate of Return using Rate Function in Excel:
=rate(nper,pmt,-pv,fv)*2
Here,
Rate = ?
Nper = 5*2 = 10 Periods
PMT = $15,000,000*4.5%/2 = $337,500
PV = $14,040,000
FV = $15,000,000
Substituting the values in formula:
=rate(10,337500,-14040000,15000000)
Rate = 6%
So, Effective Rate of Return is 6%.
| Amortization Table | ||||
| Effective Interest Method | ||||
| Period | Cash Interest | Interest Expenses | D or P Amortization | Ending Balance |
| Op. Balance | Paid | |||
| 1 | $337,500 | 421200 | $83,700 | $14,123,700 |
| 2 | $337,500 | $423,711 | $86,211 | $14,209,911 |
| 3 | $337,500 | $426,297 | $88,797 | $14,298,708 |
| 4 | $337,500 | $428,961 | $91,461 | $14,390,170 |
| Amortization Table | ||||
| Effective Interest Method | ||||
| Period | Cash Interest | Interest Expenses | D or P Amortization | Ending Balance |
| Op. Balance | Paid | (Cash Interest - Interest) | ||
| 1 | 337500 | =14040000*6%/2 | =D7-C7 | =14040000+83700 |
| 2 | 337500 | =14123700*6%/2 | =D8-C8 | =14123700+86211 |
| 3 | 337500 | =14209911*6%/2 | =D9-C9 | =14209911+88797 |
| 4 | 337500 | =14298708*6%/2 | =D10-C10 | =14298708+91461 |
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