Question

Cron Corporation is planning to issue bonds with a face value of $790,000 and a coupon rate of 13 percent. The bonds mature in five years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Cron uses the effective-interest amortization method. Assume an annual market rate of interest of 12 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.)  

1. What amount of interest expense should be recorded on June 30 and December 31 of this year?(Round your final answers to nearest whole dollar amount.)

2. What amount of cash should be paid to investors June 30 and December 31 of this year?

3.What is the book value of the bonds on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

Answer 1

Answer :

1)Bond :

Bond is a charge instrument.It is issued by corporate metropolitan specialists and by government.These are instruments issued for an assumed worth with a coupon rate.

Calculate the amount of interest expense to be recorded in income statement as below :

Description	Cash flows	PV factor @ 6 %	PV cash flows
Principal	$ 790,000	0.55839	$ 441,128
Interest	$ 51,350	7.36009	$ 377,941
Total issue price			$ 891,069

the market interest rate = 12%

But here,the interest payment is semiannually.

So,The half of 12% that is 6% will be consider as for present value.

Description	Amount June 30	Dec 31
Interest expenses	= $ 891,069 * 12% * 1/2 = $ 891,069 * 0.12 * 0.5 = $ 53,464.14
Interest expenses on December		= ($ 891,069 - ($ 51,350 - $ 53,464.14)) * 0.10 * 0.5 = ($ 891,069 - (-2114.14)) * 0.12 * 0.5 = $ 893,183 * 0.12 * 0.5 = $ 53,590.98

Here the interest expenses = $ 53,590.98

2)Calculate amount of cash to be paid to inventors june 30 and December 31 of this year as follows :

Amount of cash paid to inventors should be semi anually interest.That is coupon rate is 6.5 %and it shoulb be multiplied with face value.

Particulars	June 30	Dec 31
Cash flow	$ 51,350	$ 51,350

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