Question

Quatro Co. issues bonds dated January 1, 2019, with a par value of $900,000. 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 $947,165.

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 a straight-line amortization table for these bonds.

Answer 1

1

Premium = 947165 - 900000 = 47165

2

Interest expense = 900000 * 10% * 3 - 47165 = 222,835

3

Straight line amortization for each period = 47165/6 = 7860.83

Balance after each coupon payment is:

	Beginning balance	Amortization	Ending balance
30-Jun-19	$           47,165.00	$             7,860.83	$   39,304.17
31-Dec-19	$           39,304.17	$             7,860.83	$   31,443.33
30-Jun-20	$           31,443.33	$             7,860.83	$   23,582.50
31-Dec-20	$           23,582.50	$             7,860.83	$   15,721.67
30-Jun-21	$           15,721.67	$             7,860.83	$     7,860.83
31-Dec-21	$             7,860.83	$             7,860.83	$                 -