Quatro Co. issues bonds dated January 1, 2017, with a par value of $760,000. The bonds’...

Quatro Co. issues bonds dated January 1, 2017, with a par value of $760,000. The bonds’ annual contract rate is 10%, and interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 8%, and the bonds are sold for $799,828. 1. What is the amount of the premium on these bonds at issuance? 2. How much total bond interest expense will be recognized over the life of these bonds? 3. Prepare an amortization table for these bonds; use the straight-line method to amortize the premium.

Solutions

Expert Solution

Answer a.

Face Value of Bonds = $760,000
Proceed from Issue = $799,828

Premium on Bonds = Proceed from Issue - Face Value of Bonds
Premium on Bonds = $799,828 - $760,000
Premium on Bonds = $39,828

Answer b.

Face Value of Bonds = $760,000

Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5%*$760,000
Semiannual Coupon = $38,000

Time to Maturity = 3 years
Semiannual Period to Maturity = 6

Answer c.

Semiannual Amortization of Premium = $39,828 / 6
Semiannual Amortization of Premium = $6,638

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $38,000 - $6,638
Semiannual Interest Expense = $31,362

jeff jeffy answered 1 year ago

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