Question

Enviro Company issues 6.50%, 10-year bonds with a par value of $350,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 3.50%, which implies a selling price of 125 7/8. The straight-line method is used to allocate interest expense.
   
1. Using the implied selling price of 125 7/8. what are the issuer’s cash proceeds from issuance of these bonds?

2. What total amount of bond interest expense will be recognized over the life of these bonds?

Total Bond Interest Expense Over Life of Bonds:

Amount repaid:

20 payments of $11,375= $227,500

   Par Value at Maturity $350,000

Total repayments    $577,500

Less amount borrowed

Total bond interest expense

3. What is the amount of bond interest expense recorded on the first interest payment date?

Answer 1

1	Cash proceeds from issuance of bonds
	Issue price = Par value * selling price
		=   $350,000 *   125 (7/8)
		=   $350,000 * (125 *8 +7 ) / 8
		=    $350,000 * (1007)/8
		=    $350,000 * 125.875 %
		=   $440,562.50
Cash proceeds from issuance of bonds are $440,562.50
we used it in the form of percentage because , Issue price is more than 100% means
125.875 % of par value.
2	Bonds interest expense
	20 payments of $11,375 = $227,500
	Par value at maturity       = $350,000
	Total Repayments            = $ 5,77,500
	Less: Amount borrowed
	in from the part 1       ($440,562.50)
	Total bond interest expense = $136,937.50
3	Bonds interest expense recorded on the first interest payment date
	Payments are including premium amortized $11,375
	Premium on bonds amortized   =   ($440,562.50 - $ 350,000)/20
				= $90,562.50 /20
				= $4,528.125
	Using straightline method , as interest is semiannual 10 years bonds duration
	Period will get double as 20 periods.
	Interest expense = $11,375 - $4,528.125
		= $ 6,846.875
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