Explain each of the key factors that the time value of money depends on.
The three key factors of the time value of money are principal, number of period and interest rate.
The invested cash that earns interest over time is called the time value of money.
The time value of money depends on three factors
Reporting current and long-term liabilities
Pediatric Dispensary borrowed $390,000 on January 2, 2018, by issuing a 15% serial
bond payable that must be paid in three equal annual installments plus interest for the
year. The first payment of principal and interest comes due January 2, 2019. Complete
the missing information. Assume the bonds are issued at face value.
2018 2019 2020
Bonds Payable $ $ $
Bill and Edna had been married two years and had just reached the point where they
had enough savings to start investing. Bill’s uncle Dave told them that he had recently
inherited some very rare railroad bonds from his grandmother’s estate. He wanted
to help Bill and Edna get a start in the world and would sell them 50 of the bonds at
$100 each. The bonds were dated 1873, beautifully engraved, showing a face value of
$1,000 each. Uncle Dave pointed out that “United States of America” was printed
prominently at the top and that the U.S. government had established a sinking fund to
retire the old railroad bonds. A sinking fund is a fund established for the purpose of
repaying the debt. It allows the organization (the U.S. government, in this example)
to set aside money over time to retire the bonds. All Bill and Edna needed to do was
hold on to them until the government contacted them, and they would eventually get
the full $1,000 for each bond. Bill and Edna were overjoyed—until a year later when
they saw the exact same bonds for sale at a coin and stamp shop priced as “collectors’
items” for $9.95 each!
1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?
2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?
3. Is there a way to determine the relative risk of corporate bonds?
Determining bond prices and interest expense
Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to
borrow for a major expansion. The owner, Shane Jones, asks your advice on some
1. Answer the following questions:
a. At what type of bond price Jones Company will have total interest expense
equal to the cash interest payments?
b. Under which type of bond price will Jones Company’s total interest expense be
greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company
expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones
Company’s interest expense be for the first year?
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