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Corp2 issued $500,000 of 4-year bonds with 6% interest payable semiannually at a time when the...

Corp2 issued $500,000 of 4-year bonds with 6% interest payable semiannually at a time when the market rate of interest was 8%. What is the total amount of interest expense the company will have reported for these bonds over their 4-year life? Note—Answer this question without creating an amortization schedule.

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Answer #1

Face Value of Bonds = $500,000

Annual Coupon Rate = 6.00%
Semiannual Coupon Rate = 3.00%
Semiannual Coupon = 3.00% * $500,000
Semiannual Coupon = $15,000

Time to Maturity = 4 years
Semiannual Period = 8

Annual Interest Rate = 8.00%
Semiannual Interest Rate = 4.00%

Issue Price of Bonds = $15,000 * PVIFA(4.00%, 8) + $500,000 * PVIF(4.00%, 8)
Issue Price of Bonds = $15,000 * (1 - (1/1.04)^8) / 0.04 + $500,000 * (1/1.04)^8
Issue Price of Bonds = $15,000 * 6.73274 + $500,000 * 0.73069
Issue Price of Bonds = $466,336.10

Total Amount Paid = Semiannual Coupon * Semiannual Period + Face Value of Bonds
Total Amount Paid = $15,000 * 8 + $500,000
Total Amount Paid = $620,000

Total Interest Expense = Total Amount Paid - Issue Price of Bonds
Total Interest Expense = $620,000 - $466,336.10
Total Interest Expense = $153,663.90

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