Answer : The total bond interest expense to be recognised over the bond's life is $217,600.
We arrive at the answer as follows:
In the question above, the face value of the bond is $640,000. We <u>do not</u> consider the issue price of the bond while computing interest on the bond.
The coupon rate on the bond is 8.5%.
The bond is a four-year bond.
Substituting these values in the equation above we get,
The issue price of the bond depends on prevailing market rates (12%). Since the market interest rate is greater than the coupon rate, investors will not invest in the bond unless they also receive a return of at least 12%. So, the bond is sold at a price lesser than face value - $570,443, in order to make the bond issue attractive to the investors.
These market values are not used while computing the total interest expense on the bond.