A company issues bonds with a par value of $10,000,000 on January 1, 2013. The bonds...

A company issues bonds with a par value of $10,000,000 on January 1, 2013. The bonds have an annual coupon rate of 5%, pay interest semi-annually, and will mature in 5 years. If the market rate of interest on the bonds is 6% per year, then what is the interest expense that the company will report for the year ending December 31, 2015? [Note: the company uses the effective interest method of amortization.]

Expert Solution

Answer:

Face Value of Bonds = $10,000,000

Annual Coupon Rate = 5.00%
Semiannual Coupon Rate = 2.50%
Semiannual Coupon = 2.50% * $10,000,000
Semiannual Coupon = $250,000

Time to Maturity = 5 years
Semiannual Period = 10

Annual Interest Rate = 6.00%
Semiannual Interest Rate = 3.00%

Issue Value of Bonds = $250,000 * PVA of $1 (3.00%, 10) + $10,000,000 * PV of $1 (3.00%, 10)
Issue Value of Bonds = $250,000 * (1 - (1/1.03)^10) / 0.03 + $10,000,000 * (1/1.03)^10
Issue Value of Bonds = $250,000 * 8.530203 + $10,000,000 * 0.744094
Issue Value of Bonds = $9,573,4914

Interest Expense to be reported for year ending December 31, 2015 = $291,874 + $293,130
Interest Expense to be reported for year ending December 31, 2015 = $585,005

jeff jeffy answered 1 year ago

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