Question

Tano issues bonds with a par value of $84,000 on January 1, 2017. The bonds’ annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $77,807.
  
1. What is the amount of the discount on these bonds at issuance?
2. How much total bond interest expense will be recognized over the life of these bonds?

6 payments of___?

par value at maturity=___

3. Prepare an amortization table using the straight-line method to amortize the discount for these bonds.

Answer 1

Answer 1.

Par Value = $84,000
Issue Price = $77,807

Discount on Issue = Par Value - Issue Price
Discount on Issue = $84,000 - $77,807
Discount on Issue = $6,193

Answer 2.

Par Value = $84,000

Annual Coupon Rate = 9%
Semiannual Coupon Rate = 4.5%
Semiannual Coupon = 4.5% * $84,000
Semiannual Coupon = $3,780

Answer 3.

Discount on Issue = $6,193
Semiannual Period = 6

Semiannual Amortization of Discount = Discount on Issue / Semiannual Period
Semiannual Amortization of Discount = $6,193 / 6
Semiannual Amortization of Discount = $1,032