Question

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?

Group of answer choices

500,000,000

535,000,000

306,956,627

228,757,181

467,289,720

How much interest will The Ledge pay in 2017?

Group of answer choices

16,013,003

25,000,000

0

15,347,831

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

Group of answer choices

25,000,000

15,347,831

0

16,013,003

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

Group of answer choices

25,000,000

17,133,913

16,115,223

0

15,347,831

Answer 1

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.