Question

Enviro Company issues 11.00%, 10-year bonds with a par value of $310,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 8.00%, which implies a selling price of 124 7/8. The straight-line method is used to allocate interest expense.
   
1. Using the implied selling price of 124 7/8. what are the issuer’s cash proceeds from issuance of these bonds?
  


2. What total amount of bond interest expense will be recognized over the life of these bonds?
  


3. What is the amount of bond interest expense recorded on the first interest payment date?
  

Answer 1

Rreq 1.
Maturity value of bonds				310000
Issue price				124.875
Amount received on issuance				387112.5
	(3100*124.875)
Req 2.
20 payments of 17050 each			341000
par value of bonds			310000
Total amount repaid			651000
Less: Amount borrowed			387112.5
Total Interest expenses			263887.5
Req 3.
Cash Interest Semi annual paid (310000*11%*6/12)					17050
Less: Premium amortized					3856
(387112.5-310000)/20
Interest expense on bonds on first interest date					13194

answered by: anonymous