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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

ekkarill92 answered 2 years ago
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