Question

and other characteristics.
Required:

a. How much interest will be paid annually on these bonds? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Atom Endeavour Co. issued $21 million face amount of 4.0% bonds when market interest rates were 4.46% for bonds of similar risk and other characteristics.

Required:

a. How much interest will be paid annually on these bonds? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Annual Interest payment+

b. Were the bonds issued at a premium or discount?

-- Premium
-- Discount
c. Will the annual interest expense on these bonds be more than, equal to, or less than the amount of interest paid each year?

-- Interest expense will be less than the interest paid.
-- Interest expense will be more than the interest paid.
-- Interest expense will be equal to the interest paid.

Answer 1

Answer:

A. $840,000

B. Discount

C. Annual interest expense on these bonds will be more than  the amount of interest paid each year.

Explanation:

Data

Bonds issued = $21,000,000

Coupin rate = 4.0%

Market Interest rate = 4.46%

Requirement A: Annual interest amount

Interest amount = Bonds issued x coupon rate

Interest amount = $21,000,000 x 4.0%

Interest amount = $840,000

Requirement B: Whether it is Premium or Discount?

Bonds that Atom Endeavour Co. issued are discount as you can clearly see in the data that the market rate is higher than the coupon rate. Investors who will buy these bonds surely expect a capital gain.

Requirement C:

The discount on the issue of bonds is amortized to interest expense over the life of the bond, therefore the interest expense on these bonds will be more than the amount of interest paid each year,