Question

# A company issued 10-year, 7.00% bonds with a face value of \$100,000. The company received \$97,947...

 A company issued 10-year, 7.00% bonds with a face value of \$100,000. The company received \$97,947 for the bonds. Using the straight-line method of amortization, the amount of interest expense for the first interest period is:

Face Value of Bonds = \$100,000
Issue Value of Bonds = \$97,947

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = \$100,000 - \$97,947
Discount on Bonds = \$2,053

Annual Coupon Rate = 7.00%
Annual Coupon = 7.00% * \$100,000
Annual Coupon = \$7,000

Time to Maturity = 10 years

Annual Amortization of Discount = Discount on Bonds / Annual Period
Annual Amortization of Discount = \$2,053 / 10
Annual Amortization of Discount = \$205.30

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = \$7,000 + \$205.30
Annual Interest Expense = \$7,205.30

Interest expense for the first interest period is \$7,205.30

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