On March 23, 2013, a 5-year US government bond with a face value of $1,000 that makes annu

(c) Issue of bond

The club proposes to issue a 7% bond with a face value of $50 million on 1 January 2007 at a discount of 5%

that will be secured on income from future ticket sales and corporate hospitality receipts, which are approximately

$20 million per annum. Under the agreement the club cannot use the first $6 million received from corporate

hospitality sales and reserved tickets (season tickets) as this will be used to repay the bond. The money from the

bond will be used to pay for ground improvements and to pay the wages of players.

The bond will be repayable, both capital and interest, over 15 years with the first payment of $6 million due on

31 December 2007. It has an effective interest rate of 7·7%. There will be no active market for the bond and

the company does not wish to use valuation models to value the bond. (6 marks)

Required:

Discuss how the above proposals would be dealt with in the financial statements of Seejoy for the year ending

31 December 2007, setting out their accounting treatment and appropriateness in helping the football club’s

cash flow problems.

(Candidates do not need knowledge of the football finance sector to answer this question.)

Bao Capital issues a 4-year semiannual-pay bond with a face value of $10 million and a coupon rate of 10%.The market interest rate is 11% when the bond is issued.The balance sheet liability at the end of the first semiannual period is closestto:

A.$9,650,700.

B.$9,683,250.

C.$9,715,850.

Section B – TWO questions ONLY to be attempted

Sembilan Co, a listed company, recently issued debt finance to acquire assets in order to increase its activity levels. This debt finance is in the form. of a floating rate bond, with a face value of $320 million, redeemable in four years. The bond interest, payable annually, is based on the spot yield curve plus 60 basis points. The next annual payment is due at the end of year one.

Sembilan Co is concerned that the expected rise in interest rates over the coming few years would make it increasingly difficult to pay the interest due. It is therefore proposing to either swap the floating rate interest payment to a fixed rate payment, or to raise new equity capital and use that to pay off the floating rate bond. The new equity capital would either be issued as rights to the existing shareholders or as shares to new shareholders.

Ratus Bank has offered Sembilan Co an interest rate swap, whereby Sembilan Co would pay Ratus Bank interest based on an equivalent fixed annual rate of 3·76?% in exchange for receiving a variable amount based on the current yield curve rate. Payments and receipts will be made at the end of each year, for the next four years. Ratus Bank will charge an annual fee of 20 basis points if the swap is agreed.

Required:

(a) Based on the above information, calculate the amounts Sembilan Co expects to pay or receive every year on the swap (excluding the fee of 20 basis points). Explain why the fixed annual rate of interest of 3·76?% is less than the four-year yield curve rate of 3·8%. (6 marks)

(b) Demonstrate that Sembilan Co’s interest payment liability does not change, after it has undertaken the swap, whether the interest rates increase or decrease. (5 marks)

(c) Discuss the factors that Sembilan Co should consider when deciding whether it should raise equity capital to pay off the floating rate debt. (9 marks)

Ward and June are in the 32% tax bracket.Included in their assets is a Dell Computer Corporation bond with a face value of $10,000.The bond pays $1,000 a year in interest.Ward and June gift the bond to their son, Wally (age 19), on January 1, 2018.Wally is in the 12% tax bracket.The 2018 net tax savings for the family unit of Ward, June and Wally related to the transfer of the bond is.()

A、$0

B、$120

C、$200

D、$320

Bao Inc. issued its Class H series bonds at $10,400 on 1/1/x3. Class H bonds have a 10% coupon paid semi-annually and a face value of $10,000, maturing in two years. Using the effective interest method, calculate the amount of interest expense associated with the Class H bonds reported by Bao for the period ending 12/31/x3.

A. $405.

B. $808.

C. $1,000.

Which of the following statements is incorrect?______.

A．Debt instruments have a face value of the principal amount to be repaid at maturity.

B．Holders of equity usually take precedence over holders of debt instruments in a liquidation.

C．The interest payable on debt instruments is always specified at the outset of the loan.

D．Bonds are negotiable debt instruments.

The coupon yield of a bond______.

A．is expressed as a percentage of the par value of the bond

B．is the same as the current yield

C．changes when current interest rates change

D．changes only when the market price of the bond changes

ABC company issued a 8% semi-annual bond with 5 years to maturity. The yield to maturity at issuance is 10% per annum. If the bond’s face value is $1000, the first year end market interest rate is 8% per annum, which of the following statement is correct regarding the bond’s liability at the end of the first year?

A.The bond’s book value is $1000

B.The bond’s book value is $935

C.The bond’s book value is $937