The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $$\begin{array} { l c c }
& \underline { \mathbf { 1 0 } \% } & \underline { \mathbf { 9 \% } } \
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$$
The bond carrying value at the end of Year 1 is
A)$4,500,000.
B)$5,000,000.
C)$5,126,556.
D)$5,161,978.

Question

The Ness Company sells $5,000,000 of five-year,10% bonds at the start of the year.The bonds have an effective yield of 9%.Present value factors are below: $$\begin{array} { l c c } 
& \underline { \mathbf { 1 0 } \% } & \underline { \mathbf { 9 \% } } \
\text { PV \$1 factor 1 year } & 0.90909 & 0.91743 \
\text { PV \$1 factor 2 years } & 0.82645 & 0.84168 \
\text { PV \$1 factor 3 years } & 0.75131 & 0.77218 \
\text { PV \$1 factor 4 years } & 0.68301 & 0.70843 \
\text { PV \$1 factor 5 years } & 0.62092 & 0.64993
\end{array}$$
The bond carrying value at the end of Year 1 is
A)$4,500,000.
B)$5,000,000.
C)$5,126,556.
D)$5,161,978.

Quizplus · Accepted Answer

The bond carrying value is calculated using the effective interest rate method. The initial carrying value is the present value of the bond's cash flows at the effective yield of 9%. The interest expense for the first year is calculated as 9% of the initial carrying value, and the cash interest payment is 10% of the face value. The difference is added to the carrying value. The correct carrying value at the end of Year 1 is $5,161,978.

The Ness Company Sells $5,000,000 of Five-Year,10% Bonds at the Start