Question

TR issues 5.0%, 5-year bonds with a total face amount of $1,000,000. The market interest rate for bonds of similar risk and maturity is 5.2%. Interest is paid semi-annually. DO NOT ROUND YOUR ANSWERS UNTIL YOU FULLY COMPLETE THE PROBLEM SET (input your answers after you've completed the entire problem). 4. $ _ (rounded to nearest dollar). What is the issue price of the bond? 5. $ (rounded to nearest dollar). When the company records the first interest payment, how much will the company record for interest expense? 6. (rounded to nearest dollar). What is the bond liability (carrying amount) after the first interest $ payment? 7. $_ (rounded to nearest dollar). When the company records the second interest payment, how much will the company record for interest expense?

Answer 1

Answer 4.

Face Value of Bonds = $1,000,000

Annual Coupon Rate = 5.00%
Semiannual Coupon Rate = 2.50%
Semiannual Coupon = 2.50% * $1,000,000
Semiannual Coupon = $25,000

Annual Interest Rate = 5.20%
Semiannual Interest Rate = 2.60%

Time to Maturity = 5 years
Semiannual Period = 10

Issue Price of Bonds = $25,000 * PVA of $1 (2.60%, 10) + $1,000,000 * PV of $1 (2.60%, 10)
Issue Price of Bonds = $25,000 * (1 - (1/1.026)^10) / 0.026 + $1,000,000 / 1.026^10
Issue Price of Bonds = $991,293

Answer 5-7.

First Interest Payment:

Beginning Carrying Value = $991,293

Interest Expense = 2.60% * $991,293
Interest Expense = $25,774

Discount Amortized = $25,774 - $25,000
Discount Amortized = $774

Ending Carrying Value = $991,293 + $774
Ending Carrying Value = $992,067

Second Interest Payment:

Beginning Carrying Value = $992,067

Interest Expense = 2.60% * $992,067
Interest Expense = $25,794