Question

On Jan 1, 2019, Broke Ltd issued a 10 year, 8%, $1,000 bond, which sold for...

On Jan 1, 2019, Broke Ltd issued a 10 year, 8%, $1,000 bond, which sold for $970. The total cost of borrowing (i.e. the amount charged to interest expense over the life of the bond) for this bond would be

A. $ 800

B. $ 830

C. $ 890

D. $ 970

E. $ 1,000

F. $ 1,800

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Answer #1

The total cost of borrowing bonds:

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Answer: B. $830

Calculation:

The total cost of borrowing for a bond can be determined by working out the difference between cash received from the issue of such bond and cash payments made over the life of bonds.

a. Cash receipt from the issuance of bond = $ 970.

b. Cash payment for bonds:

i) Cash payment for principal amount = $1,000

ii) Interest on bonds ($1,000 X 8% X 10 year) = $800

Total Cash payment for bonds = $1,800

(b-a) The total cost of borrowing = $830

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