Answer:
Barnett Corporation
Table
Case A (7%) Case B (8%) Case C (6%)
Cash received at issuance $500,000 $466,449.59 $536,800.44
Interest expense recorded in Year 1 35,000 37,315.97 32,208.03
Cash paid for interest in Year 1 35,000 35,000 35,000
Cash paid at maturity for
bond principal $500,000 $500,000 $500,000
Explanation:
a) Data and Calculations:
Face value of bonds issued = $500,000
Coupon rate = 7% annually
Maturity period = 10 years
Case A (7%) Case B (8%) Case C (6%)
Cash received at issuance $500,000 $466,449.59 $536,800.44
Interest expense recorded in Year 1 35,000 37,315.97 32,208.03
Cash paid for interest in Year 1 35,000 35,000 35,000
Cash paid at maturity for
bond principal $500,000 $500,000 $500,000
Bonds Issuance At Par value At Discount At Premium
Cash received at issuance:
Case A (7%) Issued at par value
PV = Face Value/(1+0.07)^10
= $500,000/(1.07)^10
From an online calculator:
N (# of periods) 10
I/Y (Interest per year) 7
PMT (Periodic Payment) 35000
FV (Future Value) 500000
Results
PV = $500,000.00
Sum of all periodic payments $350,000.00
Total Interest $350,000.00
Interest expense for the first year = $35,000 ($500,000 * 7%)
Case B (8%) Issued at a discount
PV = Face Value/(1+0.08)^10
= $500,000/(1.08)^10
From an online calculator:
N (# of periods) 10
I/Y (Interest per year) 8
PMT (Periodic Payment) 35000
FV (Future Value) 500000
Results
PV = $466,449.59
Sum of all periodic payments $350,000.00
Total Interest $383,550.41
Interest expense for the first year = $37,315.97 ($466,449.59 * 8%)
Case C (6%) Issued at a premium
PV = Face Value/(1+0.06)^10
= $500,000/(1.06)^10
From an online calculator:
N (# of periods) 10
I/Y (Interest per year) 6
PMT (Periodic Payment) = 35000
FV (Future Value)
500000
Results
PV = $536,800.44
Sum of all periodic payments = $350,000.00
Total Interest $313,199.56
Interest expense for the first year = $32,208.03 ($536,800.44 * 6%)
