Rotor Corporation Issues $10,000,000 Face Value, 10-Year, 6% Semiannual Coupon

Rotor Corporation issues $10,000,000 face value, 10-year, 6% semiannual coupon bonds on January 1, 2013. The bonds require coupon payments on June 30 and December 31 of each year. The market initially priced the bonds to yield 6% compounded semiannually.
The current market yield on these bonds was 6.2% compounded semiannually on June 30, 2013, and 6.6% compounded semiannually on December 31, 2008. Rotor Corporation computes interest expense for each six-month period using the market yield at the beginning of the period.

Required:

a. Compute the carrying value of these bonds on January 1, June 30, and December 31 of 2013, using the fair value option. You may interpolate in the interest tables or use a calculator or use a spreadsheet program to compute the compound interest factors not provided in the tables.

b. Compute the total amount of interest expense and unrealized gain or loss for the first six months of 2013. Do not attempt to separate this amount into interest expense and holding gain or loss.

c. Compute the total amount of interest expense and unrealized gain or loss for the second six months of 2013. Do not attempt to separate this amount into interest expense and holding gain or loss.

Correct Answer:

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a.January 1, 2013: The carrying value of...

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