Question

On June 30, 2021, Singleton Computers issued 5% stated rate bonds with a face amount of $320 million. The bonds mature on June 30, 2036 (15 years). The market rate of interest for similar bond issues was 4% (2.0% semiannual rate). Interest is paid semiannually (2.5%) on June 30 and December 31, beginning on December 31, 2021. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Determine the price of the bonds on June 30, 2021. 2. Calculate the interest expense Singleton reports in 2021 for these bonds using the effective interest method.

Answer 1

Answer:

The bonds were issed at $ 355,834,328.88 dollars

Interest expense for the first year:

interest expense: $ 7,116,686.58

Explanation:

The bond value will be equal to the present value of the coupon payment and maturity:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

Coupon: 320,000,000 x 2.5% = 8,000,000

time: 15 years x 2 payment per year = 30

rate 4% divide by 2  = 0.02

$8000000 \times \frac{1-(1+0.02)^{-30} }{0.02} = PV$

PV $179,171,644.4080

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   320,000,000.00

time   30.00

rate  0.02

$\frac{320000000}{(1 + 0.02)^{30} } = PV$  

PV   176,662,684.47

PV coupon 179,171,644.41 + PV m 176,662,684.47 = $ 355,834,328.88

proceeds 355,834,329

face value 320,000,000

premium on bonds payable 35,834,329

interest expense:

carrying value x market rate:

355,834,329 x 2% = 7,116,686.58