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On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½....

On January 1, 2013, Jacob issues $600,000 of 11%, 15-year bonds at a price of 102½. The straight-line method is used to amortize any bond premium or discount. What is the total interest expense for the life of these bonds?

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Answer #1

Total interest expense for the life of a bond is equal to Interest paid in cash plus discount on issue or Interest paid in cash minus Premium on issue.

In the given question Bond is issued at premium so total interest expense will be Interest paid in cash minus Premium received on sale of bond.

Interest paid in cash= Interest @ 11% for 15 years.

Bond issue price (600000/100 x 102.5)

$ 6,15,000.00

Face value

$ 6,00,000.00

Premium on bond

$     15,000.00

Number of Interest payments

15

Total interest on bond (600000 x 11%) x 15

$ 9,90,000.00

Interest expense (990000-15000)

$ 9,75,000.00

Answer--- $975000

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