Question

Flexible Widget Corporation is planning to issue bonds with a face value of $840,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent.

1. What was the issue price on January 1st?

2. What amount of interest expense should be recorded on June 30th and December 31st?

Interest Expense June 30:

Interest Expense December 31:

3. What amount of cash should be paid to investors June 30th and December 31st?

Cash Paid June 30:

Cash Paid December 31:

4. What is the book value of the bonds on June 30th and December 31st?

Bonds Payable June 30:

Bonds Payable December 31:

Answer 1

Answer 1.

Face Value = $840,000

Annual Coupon Rate = 13%
Semiannual Coupon Rate = 6.50%
Semiannual Coupon = 6.50% * $840,000
Semiannual Coupon = $54,600

Annual Interest Rate = 12%
Semiannual Interest Rate = 6%

Time to Maturity = 5 years
Semiannual Period to Maturity = 10

Issue Price = $54,600 * PVIFA(6.0%, 10) + $840,000 * PVIF(6.0%, 10)
Issue Price = $54,600 * (1 - (1/1.06)^10) / 0.06 + $840,000 / 1.06^10
Issue Price = $870,912.37

Answer 2-4.

June 30:

Interest Expense = $52,254.74
Cash Paid = $54,600.00
Book Value = $868,567.11

December 31:

Interest Expense = $52,114.03
Cash Paid = $54,600.00
Book Value = $866,081.14