Company A received a five year $25,000 note bearing interest of 3%. The market rate of...

Company A received a five year $25,000 note bearing interest of 3%. The market rate of the note is 2.5%. What amount of interest revenue will the company record at the end of the first year

Expert Solution

Step 1 : Calculation of Issue Price of Notes

Particulars	Amount
Present value of cash interest [$750 x 4.64583 PV annuity factor (2.5%, 5 Years)]	$3,484
Present value of face value [$25,000 x 0.88385 PV factor (2.5%,5 Years)]	$22,096
Issue Price of Notes	$25,580

Step 2 : Interest revenue will the company record at the end of the first year Final Answer

Interest revenue at the end of the first year

= Issue Price of Notes(As per Step 1) × Market Rate of the note

= $25,580 × 2.5%

= $639.50

= $640 (Rounded)

Working Note

Note: i herewith providing Amortisation Scedule for all 5 years for your better understanding (Not part of Answer )

		Amortization Schedule
Year	Cash interest received	Interest revenue	Discount amortized	Carrying value
0				$25,580
1	$750	$640	$111	$25,691
2	$750	$642	$108	$25,798
3	$750	$645	$105	$25,903
4	$750	$648	$102	$26,006
5	$750	$650	$100	$26,106
Total	$3,750	$3,224	$526

ekkarill92 answered 2 years ago

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