Stanford issues bonds dated January 1, 2019, with a par value of $260,000. The bonds' annual contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $240,832.
1. What is the amount of the discount on these bonds at issuance?
2. How much total bond interest expense will be recognized over the life of these bonds?
3. Prepare an effective interest amortization table for these bonds.
1 | |||||
Discount | 19168 | =260000-240832 | |||
2 | |||||
Total interest expense over life of bonds | |||||
6 payments of $ 11700 | 70200 | ||||
Par value at maturity | 260000 | ||||
Total repaid | 330200 | ||||
Less: Amount borrowed | 240832 | ||||
Total bond interest expense | 89368 | ||||
3 | |||||
Semiannual Interest period end | Cash interest paid | Bond interest expense | Discount amortization | Unamortized Discount | Carrying value |
01/01/2019 | 19168 | 240832 | |||
06/30/2019 | 11700 | 14450 | 2750 | 16418 | 243582 |
12/31/2019 | 11700 | 14615 | 2915 | 13503 | 246497 |
06/30/2020 | 11700 | 14790 | 3090 | 10413 | 249587 |
12/31/2020 | 11700 | 14975 | 3275 | 7138 | 252862 |
06/30/2021 | 11700 | 15172 | 3472 | 3666 | 256334 |
12/31/2021 | 11700 | 15366 | 3666 | 0 | 260000 |
Total | 70200 | 89368 | 19168 | ||
Workings: | |||||
Cash interest paid | 11700 | =260000*9%*6/12 | |||
Bond interest expense = Carrying value X 12% X 6/12 | |||||
Bond interest expense: | |||||
06/30/2019 | 14450 | =240832*12%*6/12 | |||
12/31/2019 | 14615 | =243582*12%*6/12 | |||
06/30/2020 | 14790 | =246497*12%*6/12 | |||
12/31/2020 | 14975 | =249587*12%*6/12 | |||
06/30/2021 | 15172 | =252862*12%*6/12 | |||
12/31/2021 | 15366 | =256334*12%*6/12 |
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