Question

Calculate total interest for: a $500,000, 10%, ten-year bond issued at 97. The bond pays interest semi-annually on June 30 and December 31.

Answer 1

Par value of bond payable = $500,000

Interest rate = 10% annual or 5% semi annual

Bond maturity period = 10 years or 20 semi annual periods

Semi annual interest payment = Par value of bond payable x Semi annual interest rate

= 500,000 x 5%

= $25,000

Total interest payment during the life of bonds = Semi annual interest payment x semi annual interest payment periods

= 25,000 x 20

= $500,000

Par value of bonds = 500,000

Issue price = 97

Cash received for issue of bonds = 500,000 x 97%

= $485,000

Discount on bonds = Par value of bonds- Cash received for issue of bonds

= 500,000-485,000

= $15,000

Total interest expense = Cash payment of interest + Discount on bonds payable

= 500,000+15,000

= $515,000

The bond pays interest semi-annually on June 30 and December 31= $515,000

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