Adonis Corporation issued 10-year, 7% bonds with a par value of $130,000. Interest is paid semiannually....

Adonis Corporation issued 10-year, 7% bonds with a par value of $130,000. Interest is paid semiannually. The market rate on the issue date was 6%. Adonis received $139,674 in cash proceeds. Which of the following statements is true?

Adonis must pay $139,674 at maturity plus 20 interest payments of $4,550 each.
Adonis must pay $130,000 at maturity plus 20 interest payments of $4,550 each.
Adonis must pay $130,000 at maturity plus 20 interest payments of $3,900 each.
Adonis must pay $139,674 at maturity and no interest payments.
Adonis must pay $130,000 at maturity and no interest payments.

Solutions

Expert Solution

Answer: 2^nd option

Since the market interest rate (6%) is lower than the stated interest rate (7%), the bond is issued at premium.

Premium amount = Cash received – Par value of bonds

= 139,674 – 130,000

= $9,674

This premium should be amortized in 10 years out of 2 payments in each year. Therefore, the periods of amortization are (10 × 2 =) 20.

Amortization of premium in each semi-annual period = $9,674 × (1 / 20)

= $483.70

Stated interest = Face value of bond × Stated rate × (1/ 2 semi-annual payments)

= 130,000 × 7% × ½

= $4,550

Actual interest payment is $4,550 in each semi-annual period (but the interest expense is (4,550 – 483.70 =) $4,066.30) up to 20 periods and at the end of 20 years the face value of $130,000 should be paid.

ekkarill92 answered 2 weeks ago

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