a firm sells a 20 year bond for a premium of 25,000 over its 250,000 face...
a firm sells a 20 year bond for a premium of 25,000 over its 250,000 face value. bond's coupon rate is 7% and they use straight line amortization. what is their interest expense on the bond each year.
Homework Answers
Annual interest payment = Par value of bonds x Interest rate
= 250,000 x 7%
= $17,500
Premium on bonds payable =$25,000
Bond life = 20 years
Annual amortization of bond premium = Premium on bonds payable/Bond life
= 25,000/20
= $1,250
Annual interest expense =Annual interest payment- Annual amortization of bond premium
= 17,500-1,250
= $16,250
Interest expense on the bond each year = $16,250
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SOLUTION :
Face value of the bond = 250000
Premium = 25000
Maturity period of the bond = 20 years.
Coupon rate is 7% annually.
Hence, coupon amount per year
= Interest expense on the bond
= 250000 * 0.07
= 17500
Premium of 25000 is to be amortised for 20 years
As per straight line method amortisation per year
= 25000 / 20
= 1250
So, total expense (considered as interest) per year
= Coupon amount - amortised premium
= 17500 - 1250
= 16250 (ANSWER).
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