Question

Pearson Co issue its $199,500 at a price of 97, the stated rate is 6%, the...

Pearson Co issue its $199,500 at a price of 97, the stated rate is 6%, the bond term is 4 years, and the market rate is 8%. Assume the term of the bonds is 4 years.

Using the straight line method of amortization, the interest expense in the 1st year will be $_____

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Answer #1

Face Value of Bonds = $199,500

Issue Value of Bonds = $199,500 * 97%
Issue Value of Bonds = $193,515

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $199,500 - $193,515
Discount on Bonds = $5,985

Annual Coupon Rate = 6.00%
Annual Coupon = 6.00% * $199,500
Annual Coupon = $11,970

Time to Maturity = 4 years

Annual Amortization of Discount = Discount on Bonds / Time to Maturity
Annual Amortization of Discount = $5,985 / 4
Annual Amortization of Discount = $1,496.25

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $11,970 + $1,496.25
Annual Interest Expense = $13,466.25

The interest expense in the 1st year will be $13,466.25

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