Question

18) Kash n’ Karry issues $50 million of bonds on January 1, 2018 that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Date Cash Paid Interest Expense Decrease in Carrying Value Carrying Value 1/1/2018 $55,338,768 6/30/2018 2,000,000 1,936,857 63,143 55,275,625 12/31/2018 2,000,000 1,934,647 65,353 55,210,272.

1. Were the bonds issued at face amount, a discount, or a premium?

2. What is the original issue price of the bonds?

3. What is the face amount of the bonds?

4. What is the stated annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.)

5. What is the market annual interest rate? (Hint: Be sure to provide the annual rate rather than the six month rate.)

6. What is the total cash paid for interest assuming the bonds mature in 20 years?

Answer 1

• All working forms part of the answer
• Answer 1

Bonds are issued at a PREMIUM because on the date of Issue (Jan 1 2018) the Carrying Value ($ 55,338,768) is GREATER than Face Value (of $ 50,000,000).

• Answer 2

Original Issue price of the bonds = Carrying Value of Bonds on the date of Issue = $ 55,338,768.

• Answer 3

Face Amount of the Bonds = $ 50 millions = $ 50,000,000

• Answer 4

Cash Interest paid = $ 2,000,000 for six month on $ 50,000,000

6 month interest rate = (2000000 / 50000000) x 100 = 4%

ANNUAL (12 months) stated Interest rate = 4% x 2 = 8%

• Answer 5

Interest Expense on 6/30/2018 = $1,936,857

Carrying Value on which above interest expense is based = $ 55,338,768

6 month Market Interest rate = (1936857/55338768) x 100 = 3.5%

ANNUAL (12 months) Market Interest rate = 3.5% x 2 = 7%

• Answer 6

Term = 20 years.

Interest payments = Semi Annually for 20 years = 40 interest payment.

Cash interest for one six month period = $ 2,000,000

Total Cash paid for Interest = $ 2,000,000 x 40 Interest payments = $ 80,000,000