On June 30, 2012, Imperial Inc. purchased $500,000 of Acme Corp. 5% bonds at a price to yield a market interest rate of 6%. The bonds pay interest semi-annually on June 30 and December 31, and mature on June 30, 2022. Imperial plans to hold this investment until it matures. At December 31, 2012, which is the year end for both companies, the bonds were trading at 93.
Instructions
(a) Calculate the present value (issue price) of the bonds on June 30, 2012.
(b) For Imperial, the investor, record
1. The purchase of the bonds on June 30, 2012,
2. The receipt of interest on December 31, 2012,
3. The receipt of interest on June 30, 2013.
(c) For Acme, the investee (issuer), record
1. The issue of the bonds on June 30, 2012,
2. The payment of interest on December 31, 2012,
3. The payment of interest on June 30, 2013.
(d) Explain how your responses to (a) and (b) would differ if Imperial classified the bond investment as a trading investment instead of one that would be held until maturity.