Question

Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5%, which implies a selling price of 123 ⅜. The straight-line method is used to allocate interest expense. 1.Using the implied selling price of 123 ⅜, what are the issuer's cash proceeds from issuance of these bonds. 2.What total amount of bond interest expense will be recognized over the life of these bonds? 3.What is the amount of bond interest expense recorded on the first interest payment date?

Answer 1

Answer:

1.- cash proceeds $308,473.5

2.- Interest Expense 141526.5

3.- Bond interest expense on first payment 7076.33

Explanation:

1.-

$Nominal \times \frac{issued \: points}{100}= cash\: proceeds\\250,000 \times \frac{123 + 3/8}{100} = 308,473.5$

Notice that it is (123 + 3/8) is a percent (%) that's why is important to divide by 100

2.-

308,473.5 - 250,000 = 58473.5 premium on bonds

This decrease the interest expense from the cash proceeds

Cash proceeds

250,000 * 0.04 * 20 = 200,000

- Amortization on Premium (58473.5)

Interest Expense                     141526.5

3.-

It will use striaght-line method so

$\frac{premiun \: on\: bonds}{total \: payments}= amortization \: per \: payment$

10 years * 2 payment per year = 20 payment in the lifetime of the bond

58473.5/20 = 2923.67

Cash proceeds - Premimun = Interest Expense

10,000 - 2923.67 = 7076.33