Question

On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Cash Payment Effective Interest Increase in Balance Payment 280,000 280,000 280,000 280,000 280,000 280,000 293,611 294,428 295, 293 296,211 297,184 298, 215 13,611 14,428 15,293 16.211 17.184 18, 215 Outstanding Balance 4,893,518 4,997,129 4,921,557 4,936,850 4,953,061 4,970,245 4,988,460 280,000 280,000 280,000 397,547 404,689 412,872 117,547 124,600 132,072 6,743, 328 6,867,928 7,800,000 Required: 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective interest expense recorded over the term to maturity? 1. years Face amount Initial selling price Term to maturity Interest is determined by what approach? Annual interest rate Effective annual interest rate Total cash interest paid Effective interest expense

Answer 1

Solution:

1. face amount = 7,000,000

2. Initial selling price = 4,893,518

3. term to Maturity = 40 half years/ 2 = 20 years

4. Interest is determined by = Effective Interest Approach

5. Annual Interest Rate = 280,000/ 7000,000 *2 = 8%

6. Effective annual interest rate = 293,611 / 4,893,518 *2 = 12%

7. Total cash Interest paid = 280000*40 = 11,200,000

8. Effective interest expense = Total cash Interest paid + principal payment at maturity - Amount of Initial selling price

= 11,200,000 + 7,000,000 - 4,893,518 = 13,306,482