Problem 1 - On January 1, of 2017, XYZ Co. sells $1,000,000 (1000 bonds with a $1,000 face value) of their 3 percent coupon rate, 10 year bonds with an annual interest payment date of December 31.
1. How much will XYZ get for the sale of the bonds on 1/1/17 if they are sold at a market interest rate of 5%? Will this sale result in a premium or a discount?
2. How much will XYZ get for the sale of the bonds on 1/1/17 if they are sold at a market interest rate of 2%? Will this sale result in a premium or a discount?
Problem 2 - On January 1, of 2017, XYZ Co. sells $200,000 (200 bonds with a $1,000 face value) of their zero coupon rate, 4 year bonds with an annual interest payment date of December 31. The bonds are sold to investors at a market rate of interest of 4 percent.
1. How much did XYZ get for the sale of the bonds on 1/1/17?
2. What would the interest expense be on these bonds on 12/31/17 and 12/31/18?
3. What would the liability be on these bonds on 12/31/17 and 12/31/18?
Problem 3 - On January 1 of 2017 ABC Co. sold $500,000 (500 bonds with a $1,000 face value) of their 4 percent coupon rate 5 year bonds with an annual interest payment date of December 31. The bonds were sold to investors at a market rate of interest of 6 percent and thus, sold for approximately $457,877. Using this selling price, please respond to the following questions.
1. What will be the interest expense on these bonds for the 2017? What will be the interest expense for 2018?
2. What will be the Company's actual liability related to the bonds as of December 31, 2017 and 2018, respectively?
3. Assume that on 12/31/17 (one year after issuance), the interest rate being demanded by investors goes to 3%.
a. If the Company buys back the bonds at that time how much will it cost?
b. Indicate the amount of the gain or loss that will be incurred because of the buy back.
Problem 4 - Brady Co. has the following unit cost information for the year 2017.
Sales price per unit $60
Variable manufacturing costs $15
Fixed manufacturing costs $20
Variable selling and admin costs $9
Fixed selling and admin costs $10
Cost per unit $54
Number of units produced and sold 100,000
1. What income would Brady Co. earn if they produced and sold 110,000 units?
2. How many units must be sold for Brady Co. to breakeven?
3. Assume that Brady does breakeven in 2017. What would be the sales revenue reported on Brady's 2017 income statement?