Question

1. A firm sells a 20-year bond for a premium of $25,000 over its $250,000 face value. If the bond's coupon rate is 7%, and they use straight-line amortization methods for all intangibles, what is their interest expense on the bond each year?

Answer 1

Bond face Value = $ 250,000

No of years = 20 years

Coupon Rate = 7% [Assumed to be per annum]

Coupon amount per annum = 7% * 250,000 = $ 17,500

Premium collected for issue of bond = $ 25,000

Since the company use straight line amortization for all intangibles, the premium collected will be recorded over the duration of bond i.e. 20 years. Premium recorded in each year = $ 25,000 / 20 years = $ 1,250

Hence, the per year expense of interest is $ 17,500 and per year premium amortised is $ 1,250. Therefore the net charge to PL will be = Interest expense per year - Premium amortised per year

= $ 17,500 - $ 1,250

= $ 16,250

The expense charged per annum will be $ 16,250.