Question

On June 30, 2020, Shamrock Company issued $4,470,000 face value of 14%, 20-year bonds at $5,142,560, a yield of 12%. Shamrock uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31.

Determine the total cost of borrowing over the life of the bond. (Round answer to 0 decimal places, e.g. 38,548.)

Total cost of borrowing over the life of the bond $

Answer 1

Solution Face value of Receipts from bonds@147 =$4,490,000 issue $5,142,560. Given Premium on issue Proceeds of face value Issue of proceeds. = 5,142,560 - 4,479 000 = $ 672,560/- that Intrest is paid semi anually on June 30, Dec 31. Intrest So, Intrest paid = Face value & rate - 4,490,000 x 147 = 312,900/- Discounting rate = 12% (given yield) period of bond = 20 years In trest is paid is semi-ammually So the rate of discounting - 12 = 6%
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No. of periods = 20 years x2 times anually - 40 -:PUAR (6740) = 15.0463 (Present value annuity interest rate of 6t and factor for at the 40 periodo payment i present value all Intrest = 312,900x 15.0463 $4,707,987/- Total Borrowing cost = - present value Premium of Intrest payments Issue = $4,707,987 - $ 672,560 a $ 4035,427 an
The total cost of borrowing is calculte by deducting the preimium on the issue of Bonds from present value of total intrest payments.

Present value of total intrest payments is calculated by discountig the all the future payments with the yield rate.

It is calculated by multiplying the semi annual intrest with the present value annuity factor of given period

For solution please refer the attachment