Question

Auerbach Inc. issued 4% bonds on October 1, 2021. The bonds have a maturity date of September 30, 2031 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2022. The effective interest rate established by the market was 6%.
Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2022, rounded up to the nearest thousand?
a) $256,369,000
b) $252,369,000
c) $257,030,000
d) $256,300,000

Answer 1

Answer:

C) $257,030,000

Explanation:

Auerbach's net bond liability on March 31, 2022:

• we start with the beginning liability $255,369,000
• plus interest accrued for six months = $255,369,000 x 6% x 6/12 = $7,661,070
• minus cash paid = $300,000,000 x 4% x 6/12 = $6,000,000

net bond liability = $255,369,000 + $7,661,070 - $6,000,000 = $257,030,070 ≈ $257,030,000 rounded to the nearest thousand