Lyons Document Harvard Case

1. Lyons Document Storage’s controller, Eric Petro, told Rene that the bonds were issued in 1999 at a discount and that only approximately $9.1 million was received in cash. Explain what is meant by the terms “premium” or” discount” as they relate to bonds. Compute exactly how much company received from its 8% bonds if the rate prevailing at the time of the original issues was 9% as indicated in Exhibit2. Also, re-compute the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt. What is the current market value of the bonds outstanding at the current effective interest rate of 6%?

Explain what is meant by the terms “premium” or” discount” as they relate to bonds.

In terms of “premium bond”, a bond will trade at a premium when its coupon rate is higher than prevailing/market interest rates. It means bonds be sold at a price greater than the face value or par value. Conversely, if a bond trades at a discount when its coupon rate is lower than prevailing/market interest rates, this bond is called as “discount bond”. It means the bond’s price will be less than the face value or par value.

Compute exactly how much company received from its 8% bonds if the rate prevailing at the time of the original issues was 9% as indicated in Exhibit2.

Number of payments = 20*2 = 40

Interest rate = 9%/2 = 4.5%

Interest payment = 10,000,000*8%/2 = 400,000

Face Value = 10,000,000

* Present Value = $9,079,920.78

The present value is the exact amount the company received in 1999 from its 8% bonds if the rate prevailing at the time of the original issues was 9%.

Re-compute the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt.

According to the above table, the amounts shown in the balance sheet at December 31, 2006, and December 31, 2007, for Long-Term Debt are $9,258,589.55 and $9,292,611.26 respectively.

What is the current market value of the bonds outstanding at the...