Question

On January 1, 2020, Short Company issued bonds with a face value of $ 10,000,000. The bonds had a coupon rate of 8%, paid interest annually on December 31 of each year, and matured on December 31, 2029.At the time the bonds were issued, the market was requiring a 10% rate of return on bonds with a similar credit risk and maturity as those issued by Short Company.
Assuming that Short Company makes all payments related to the bonds as scheduled, what is the Total Interest Expense that Short Company will report over the life of the Bonds?
The Present Value Factor for 10 years at 8% is 0.4632, for 10 years at 10% is 0.3855
The Present Value of an Annuity Factor for 10 years at 8% is 6.7101, for 10 years at 10% is 6.1446
If applicable, for purposes of this problem please use the factors provided above to avoid having your answer marked "incorrect" due to a "rounding error".

A.8,000,000

B.9,229,320

C.10,000,000

D.None of the above

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	10
i=	10.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.38550	$10,000,000.00	$3,855,000
Interest (Annuity)	6.14460	$800,000.00	$4,915,680
Price of bonds			$8,770,680

Total Interest Expense that Short Company will report over the life of the Bonds = Total interest paid + Discount amortized

= ($800,000 *10) + ($10,000,000 - $8,770,680) = $9,229,320

Hence option B is correct.