Treadway Company issued bonds with a face value of $20,000 on January 1, 2017. The bonds were
Question:
Treadway Company issued bonds with a face value of $20,000 on January 1, 2017. The bonds were due to mature in five years and had a stated annual interest rate of 8 percent. The bonds were issued at face value. Interest is paid semiannually.
a. As of December 31, 2017, market interest rates had decreased by 2 percent, and the market price of Treadway bonds reflected the entire change. Compute the present value of Treadway’s bond liability as of that date, using the new effective interest rate (6 percent), and determine the economic gain or loss experienced by the company.
b. Assume instead that as of December 31, 2017, market interest rates had increased by 2 percent, and the market price of Treadway’s bonds reflected the entire change. Compute the present value of Treadway’s bond liability as of that date, using the new effective interest rate (10 percent), and determine the economic gain or loss experienced by the company.
c. What is the intuition underlying such gains and losses, and why are they not reflected on the financial statements? If you were analyzing the financial statements of Treadway, what could you do to improve the reported numbers?
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...
Step by Step Answer:
a Since it is one year later two interest periods have passed Thus there are only eight remaining interest periods Present value i 3 n 8 PV of face value 20000 07894 from Table 4 in Appendix A 1578800 ...View the full answer
