Question

On January 1, 2016, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:

  

Payment	Cash Payment	Effective Interest	Increase in Balance	Outstanding Balance
				6,047,387
1	292,000	302,369	10,369	6,057,756
2	292,000	302,888	10,888	6,068,644
3	292,000	303,432	11,432	6,080,076
4	292,000	304,004	12,004	6,092,080
5	292,000	304,604	12,604	6,104,684
6	292,000	305,234	13,234	6,117,918
~	~	~	~	~
~	~	~	~	~
~	~	~	~	~
38	292,000	355,060	63,060	7,164,267
39	292,000	358,213	66,213	7,230,480
40	292,000	361,520	69,520	7,300,000

Required:

1.	What is the face amount of the bonds?

      

2.	What is the initial selling price of the bonds?

      

3.	What is the term to maturity in years?

       

4.	Interest is determined by what approach?
	Effective interest rate Straight-line approach

   

5.	What is the stated annual interest rate?

      

6.	What is the effective annual interest rate?

      

7.	What is the total cash interest paid over the term to maturity?

        

8.	What is the total effective interest expense recorded over the term to maturity?

      

Answer 1

Answer to Part 1:

Face amount of the Bonds = $7,300,000

Answer to Part 2:

Initial Selling Price of the Bonds = $6,047,387

Answer to Part 3:

Term to Maturity in years = 40 Semi annual payment = 20 years

Answer to Part 4:

Interest is determined by Effective Interest rate, as the Interest Expenses / Effective Interest is changing for each semi-annual payment.

Answer to Part 5:

Interest Payment = Face Amount of Bonds * Stated Annual Interest Rate * Period
$292,000 = $7,300,000 * Stated Annual Interest Rate * 6/12
Stated Annual Interest Rate = 292,000 * 12/6 * 1/7,300,000
Stated Annual Interest Rate = 8%

Answer to Part 6:

Effective Interest = Outstanding Balance * Effective Annual Interest Rate * Period
$302,369 = $6,047,387 * Effective Annual Interest Rate * 6/12
Effective Annual Interest Rate = $302,369 * 12/6 * 1/ 6,047,387
Effective Annual Interest Rate = 10%

Answer to Part 7:

Total Interest paid over the term of maturity = Face amount of Bond * Stated Annual Interest Rate * Terms to maturity
Total Interest paid over the term of maturity = $7,300,000 * 8% * 20
Total Interest paid over the term of maturity = $11,680,000

Answer to Part 6:

Total Effective Interest Expense recorded over terms to Maturity = Interest paid over term of maturity + Discount on Bonds
Total Effective Interest Expense recorded over terms to Maturity = $11,680,000 + $12,712,953
Total Effective Interest Expense recorded over terms to Maturity = $24,392,953