Question

A company issues 9%, 4-year bonds with a par value of $160,000 on January 1 at a price of $165,386, when the market rate of interest was 8%. The bonds pay interest semiannually. The amount of each semiannual interest payment is:

Multiple Choice

• $14,400.

• $0.

• $12,800.

• $7,200.

• $6,400

  2) A company issued 5-year, 5% bonds with a par value of $91,000. The company received $88,947 for the bonds. Using the straight-line method, the amount of interest expense for the first semiannual interest period is:

  Multiple Choice

• $2,069.70.

• $2,275.00.

• $2,480.30.

• $4,960.60.

• $4,550.00.

  3) A company issued 5-year, 7% bonds with a par value of $500,000. The market rate when the bonds were issued was 6.5%. The company received $505,000 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:

  Multiple Choice

• $17,000.

• $18,000.

• $35,000.

• $34,500.

• $17,500.

Answer 1

Solution Question #1 $160,000 Par value of Bonds Issue price of Bonds Coupon rate of interest $165,386 9.00% Market rate of interest 8.00% Interest payment frequency Semi-annually Semi-Annual interest payment Par value x Coupon rate of interest/2 = $160,000 x 9% / 2 $7,200 The amount of each semiannual interest payment is $7,200 Question #2 Par value of Bonds $91,000 Issue price of Bonds Coupon rate of interest $88,947 5.00% Semi-annually Interest payment frequency Bond life 5 Years Total no. of interest payments till maturity (5 Years x 2) 10 =Par value x Coupon rate of interest/2 Semi-Annual interest payment = $91,000 x 5%/2 $2,275 Computation of semi-annual interest expense using the straight-line method Total interest payment during the entire Bond life ($2,275 x 10) $22,750 Payment of par value on maturity of Bonds $91,000 ($88,947 Less: Issue price of Bonds Total Interest expense to be recognised during the entire Bond life $24,803 Semi-Annual Interest Expense to be recognised ($24,803/10) $2,480.30 Using the straight-line method, the amount of interest expense for the first semiannual interest period is: $2,480.30 Question#3 Par value of Bonds $500,000 $505,000 Issue price of Bonds Coupon rate of interest Market rate of interest 7.00% 6.50% Semi-annually Interest payment frequency Bond life 5 Years Total no. of interest payments till maturity (5 Years x 2) 10 Par value x Coupon rate of interest/2 Semi-Annual interest payment = $500,000 x 7% /2 = $17,500 Computation of semi-annual interest expense using the straight-line method $175,000 Total interest payment during the entire Bond Ilife ($17,500 x 10) Payment of par value on maturity of Bonds Less: Issue price of Bonds Total Interest expense to be recognised during the entire Bond life $500,000 ($505,000) $170,000 Semi-Annual Interest Expense to be recognised ($170,000/ 10) $17,000 Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period $17,000 is: