Question

On June 30, 2021, Singleton Computers issued 6% stated rate bonds with a face amount of $100 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 5% (2.5% semiannual rate). Interest is paid semiannually (3.0%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds on June 30, 2021.
2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.

Answer 1

1) Price of the bonds on June 30, 2021 = $ 110,465,146.30

Working:

Present value of interest	$    62,790,877.78
[100,000,000*3/100*20.93029 PV annuity factor (2.5%, 15 years, semi annually interest)]
Present value of the notes	$    47,674,268.52
[100,000,000*0.476743 PV ordinary factor (2.5%, 15 years)]
price of bonds	$ 110,465,146.30

2) Interest expense Singleton reports in 2021 [using the effective interest method] = $ 2,761,628.65

Working:

Interest Expense = Bond Price * 2.5% = $ 110,465,146.30 * 2.5% = $ 2,761,628.65