Question

On January 1, 20x1, Smith Company issued $15,000,000 of 20-year, 5% bonds, with interest payable annually on December 31 of each year. The bonds were sold at an effective rate of 7% for $11,821,800.

22.        What is the maturity value of the bond issue?

23.        What is the coupon rate?

24.        What is the yield?

25.        This is a multi-part problem because the answers are dependent upon one another such that missing one part would likely result in missing other parts.

            a.          How much interest will be paid to bondholders every year? Show your calculations.

b.         Consider the bond amortization schedule for 20x1 (the year of issuance). How much interest expense would be shown on the 20x1 income statement? Show your calculations

c.          Again consider the 20x1 amortization schedule. By how much would the premium or discount be amortized in 20x1? Show your calculations.

d.          Continue to consider the 20x1 amortization schedule. What would the carrying value of the bonds be on the 20x1 year-end balance sheet? Show your calculations.

26.        Flash forward 20 years. After the last annual interest payment and amortization of the discount or premium, what will the carrying value of the bonds be?

27.        This is a multi-part problem.

          a.          How much total cash interest payments will be paid over the entire life of the bond issue? Show your calculations.

b.          How much total interest expense will be reported over the entire life of the bond issue? Show your calculations. (The computations are quite simple. You do not need a complete amortization schedule to answer it.)

c.          Why are your answers to Parts (a) and (b) different? Be specific.

Answer 1

22) Maturity Value	$ 15,000,000.00
23) Coupon Rate	5%
24)
FV	$ 15,000,000.00
Coupon Payment	$      750,000.00
Period	20
PV	$ 11,821,800.00
Rate = Yield	7.00%
25)
A	B	C	D	E	F	G
Period	Interest Payment = 5% x face value	Interest Expenses = B+D	Amortization of Bonds Discount= C - B	Credit Balance in bonds discount Account	Credit Bal in Bonds Payable	Carrying  Value of Bonds F- E
1/1/01				$      3,178,200	$      15,000,000	$      11,821,800
31-Dec	$           750,000	$      827,526	$      77,526	$      3,100,674	$      15,000,000	$      11,899,326
31-Dec	$           750,000	$      832,953	$      82,953	$      3,017,721	$      15,000,000	$      11,982,279
31-Dec	$           750,000	$      838,760	$      88,760	$      2,928,962	$      15,000,000	$      12,071,038
31-Dec	$           750,000	$      844,973	$      94,973	$      2,833,989	$      15,000,000	$      12,166,011
31-Dec	$           750,000	$      851,621	$    101,621	$      2,732,368	$      15,000,000	$      12,267,632
31-Dec	$           750,000	$      858,734	$    108,734	$      2,623,634	$      15,000,000	$      12,376,366
31-Dec	$           750,000	$      866,346	$    116,346	$      2,507,288	$      15,000,000	$      12,492,712
31-Dec	$           750,000	$      874,490	$    124,490	$      2,382,799	$      15,000,000	$      12,617,201
31-Dec	$           750,000	$      883,204	$    133,204	$      2,249,594	$      15,000,000	$      12,750,406
31-Dec	$           750,000	$      892,528	$    142,528	$      2,107,066	$      15,000,000	$      12,892,934
31-Dec	$           750,000	$      902,505	$    152,505	$      1,954,561	$      15,000,000	$      13,045,439
31-Dec	$           750,000	$      913,181	$    163,181	$      1,791,380	$      15,000,000	$      13,208,620
31-Dec	$           750,000	$      924,603	$    174,603	$      1,616,777	$      15,000,000	$      13,383,223
31-Dec	$           750,000	$      936,826	$    186,826	$      1,429,951	$      15,000,000	$      13,570,049
31-Dec	$           750,000	$      949,903	$    199,903	$      1,230,047	$      15,000,000	$      13,769,953
31-Dec	$           750,000	$      963,897	$    213,897	$      1,016,151	$      15,000,000	$      13,983,849
31-Dec	$           750,000	$      978,869	$    228,869	$         787,281	$      15,000,000	$      14,212,719
31-Dec	$           750,000	$      994,890	$    244,890	$         542,391	$      15,000,000	$      14,457,609
31-Dec	$           750,000	$   1,012,033	$    262,033	$         280,358	$      15,000,000	$      14,719,642
31-Dec	$           750,000	$   1,030,375	$    280,358	$                    0	$      15,000,000	$      15,000,000
	$      15,000,000	$ 18,178,217	$ 3,178,200
a) Interest Paid	$           750,000
b) Interest Exp.	$           827,526
c) Discount Amortized	$             77,526
d) Carrying Value	$      11,899,326
26)
Carrying Value	$      15,000,000
27)
a) total cash interest payments	$      15,000,000
b) total interest expense will be reported over the entire life of the bond issue	$      18,178,217
c)
answers to Parts (a) and (b) different because of
The coupon payment is calculated on the face value of the bond, which is being invested. The interest rate is calculated considering the basis of the riskiness of lending the amount to the borrower on carrying value