Question

Enviro Company issues 14.00%, 10-year bonds with a par value of $500,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 11.00%, which implies a selling price of 129.625. The straight-line method is used to allocate interest expense.
Required:
a. Using the implied selling price of 129 5/8. what are the issuer's cash proceeds from issuance of these bonds?
b. Whet total amount of bond interest expense will be recognized over the life of these bonds?

Answer 1

Answer: a. $648,125

b. $551875

Explanation:

a. Using the implied selling price of 129 5/8. what are the issuer's cash proceeds from issuance of these bonds?

Bonds Face Value = $500,000

Cash Proceeds will then be:

= 129.625% × $500,000

= $648,125

b. What total amount of bond interest expense will be recognized over the life of these bonds?

20 payments of $35000 = $700000

Pee value at maturity = $500000

Total repaid = $1200000

Less: Amount borrowed = $648125

Total bond Interest expense = $551875