Question

# On January 1, 2017, The Ledge Inc. issued \$500 million of zero coupon bonds at a...

On January 1, 2017, The Ledge Inc. issued \$500 million of zero coupon bonds at a market yield of 5%. The bonds mature in 10 years.

What was the issue price of these bonds on 1/1/17? In other words, how much money was raised?

500,000,000

535,000,000

306,956,627

228,757,181

467,289,720

How much interest will The Ledge pay in 2017?

16,013,003

25,000,000

0

15,347,831

How much interest expense will The Ledge record on its income statement in 2017?

25,000,000

15,347,831

0

16,013,003

How much interest expense will The Ledge record on its income statement in 2018?

25,000,000

17,133,913

16,115,223

0

15,347,831

A) Issue price of the bond

Principal payable at maturity = \$500 million

The bonds mature in 10 years.

market yield of 5%

PV factor for 10yrs, 5% = 0.6139

Issue price of the bonds will be 500*0.6139=306.95 Million\$

306,956,627\$ option B

B) It is a Zero coupon bond so interest paid will be Zero option C

C) interest expense will The Ledge record on its income statement in 2017

= 500Million * 5% interest = 25,000,000 option A = 25 million

D) interest expense will The Ledge record on its income statement in 2018

= 25,000,000 \$ option A, same as above since the interst rate is recorded for previous year in expense

there will be no retained earnings to record.

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