On January 1, 2021, a company issues $720,000 of 8% bonds, due in six years, with interest payable semiannually on June 30 and D
ecember 31 each year. Assuming the market interest rate on the issue date is 7%, the bonds will issue at $754,788. Required:
(a) Record the bond issue on January 1, 2021, and the first two semi-annual interest payments on June 30, 2021, and December 31, 2021. (Round your answers to the nearest dollar amount.)
The bonds are issued at more than their par value thus, it is an issue on premium. The premium amount is the difference in issue value and par value = 754788 - 720000 = 34788
The interest is payable on 8% p.a of par value which come out to be 720000 * 0.08 = 57600
This interest is paid semi annually in cash. the semi annual payment will be 57600 / 2 = $28800
First, we calculate for the effective annual interest given the interest in the scenario. ieff = (1 + i/m)^m - 1 Substituting the values, ieff = (1 + 0.04/12)^12 - 1 = 0.0407 The effective interest is equal to 4.07%.
The future amount after 2 years, F = ($6000) x (1.0407)^2 = $6498.86
