Question

The carrying value of 9% bonds with face value of $4,500,000 is $4,792,300. The bonds have 6 years to maturity. Interest is payable semiannually. Assuming that the next coupon payment is after 6 months, how much is the total interest expense until maturity?

Answer 1

Par value of bonds = $4,500,000

Stated interest rate = 9%

Bonds life = 6 year

Semiannual interest payment periods = 6 x 2

= 12

Semiannual interest payment = Par value of bonds x Stated interest rate x 6/12

= 4,500,000 x 9% x 6/12

= $202,500

Total interest payment during the life of bonds = Semiannual interest payment x Semiannual interest payment periods

= 202,500 x 12

= $2,430,000

Carrying value of bonds = $4,792,300

Premium on bonds payable = Carrying value of bonds - Par value of bonds

= 4,792,300 - 4,500,000

= $292,300

Total interest expense until maturity = Total interest payment during the life of bonds - Premium on bonds payable

= 2,430,000 - 292,300

= $2,137,700

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