Question 3 On 1 July 2021 Michael Ltd. issues $1 million in five-year debentures that pay interest each six months at a coupon rate of 10% per annum. At the time of issuing the securities, the market requires a rate of return of 12% per annum. Interest expense is determined using the effective- interest method. Required: (a) Determine if the issuance of the debenture is at premium or discount? ANSWER a): (b) Determine the issue price of the debentures ANSWER b): (c) Prepare journal entries at issue date on 1 July 2021 (assuming the debentures are issued privately)? ANSWER c): (d) Pass the journal entry for the first interest payment ANSWER d):

Question 3 On 1 July 2021 Michael Ltd. issues $1 million in five-year debentures that pay interest each six months at a coupon rate of 10% per annum. At the time of issuing the securities, the market requires a rate of return of 12% per annum. Interest expense is determined using the effective- interest method. Required: (a) Determine if the issuance of the debenture is at premium or discount? ANSWER a): (b) Determine the issue price of the debentures ANSWER b): (c) Prepare journal entries at issue date on 1 July 2021 (assuming the debentures are issued privately)? ANSWER c): (d) Pass the journal entry for the first interest payment ANSWER d):

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter6: Fixed-income Securities: Characteristics And Valuation

Section: Chapter Questions

Problem 3P

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Week 2a) What factors should be considered in determining the issue price of a debenture. b) On 1 July 2018 Bombo Ltd issues $2 million in six-year debentures that pay interest each six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of return of 6 per cent. Interest expense is determined using the effective-interest method.Required:(i) Determine the issue price of the debenture.(ii) Provide the journal entries at: 1 July 2018, 30 June 2019, & 30 June 2020
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