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To lower the costs associated
with a bond issue, Tampa Mining Company sells debt securities worth $100
million directly to an insurance company. What is this an example of?
Private Placement, To keep costs
down, the issuing company might choose to sell the debt securities
directly to a single investor, such as a large investment fund or an
insurance company. This is referred to as a private placement.
A bond requires full payment of
the full principle amount of the bond at a single maturity date. The
investers assurance or security is the "full faith and credit" of the
borrower. It has a feature that protects the borrowere against future
drops in interest rates. Which bonds are these?
Windsor, Inc., issues 7 percent,
10-year bonds with a face amount of $1 million on January 1, 2012, for
$932,048, when other bonds of similar risk are paying 8 percent.
Interest expense associated with this bond for the first semiannual
37,282 Think about the carrying value and the interest rate that should be used for calculating this expense.
On January 1, 2012, a company
issues $100,000 of 8 percent bonds maturing in 10 years when other bonds
of similar risk pay 9 percent. The bonds were issued at a discount.
Market interest rates drop to 6 percent by December 31, 2013. The
company retires these bonds on December 31, 2013. Which of the following
The bonds can be retired at their carrying value
The company will incur a loss
The company will incur a gain
No gain or loss will be recorded
The company will occur a loss, Think of the difference between the carrying value and the retirement price.
Zeta Corporation issues $100,000
of 8 percent bonds maturing in 10 years on January 1, 2012, when other
bonds of similar risk pay 9 percent. The bonds were issued at a
discount. Market interest rates drop to 7 percent by December 31, 2012.
The company retires these bonds on December 31, 2012. How much did it
cost the company to retire them?
Use the new market interest rate and the remaining periods to maturity in your calculations.