Question
In: Accounting
Town Bank has $400,000 of 6% debenture bonds outstanding. The bonds were issued at 102 in...
Town Bank has $400,000 of 6% debenture bonds outstanding. The
bonds were issued at 102 in 2018 and mature in 2038. The bonds have
annual interest payments.
1. How much cash did Town Bank receive when it issued
these bonds?
2. How much cash in total will Town Bank pay the
bondholders through the maturity date of the bonds?
3. Calculate the difference between your answers to
requirements 1 and 2. This difference represents Town Bank's total
interest expense over the life of the bonds.
4. Compute Town Bank's annual interest expense using
the straight-line amortization method. Multiply this amount by 20.
Your 20-year total should be the same as your answer to
requirement 3.
Solutions
Expert Solution
| Requirement 1: | |||||||||
| Citi Bank Received = Issue price x Total value / Face Value | |||||||||
| = 102 x 400,000/100 | |||||||||
| = 408000 | |||||||||
| Requirement 2: | |||||||||
| Citi Bank will pay the bondholders = Total value + Total Value x Coupon rate x Total maturity years | |||||||||
| = 400000 + 400000 x 6% x 20 | |||||||||
| = 880000 | |||||||||
| Requirement 3: | |||||||||
| The difference between requirement 1 and 2 = 880,000.00 - 408,000.00 | |||||||||
| = $472,000.00 | |||||||||
| Requirement 4: | |||||||||
| Citi Bank’s annual interest expense by straight line amortization method = Requirement 3/Total years | |||||||||
| = $472,000.00/20 | |||||||||
| = 23600 | |||||||||
| Multiply by 20 = $ 23,600.00 x 20 | |||||||||
| = $472,000.00 | |||||||||
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