Question

1. Sleet Company has proposed a bond offering of $5,000,000 at a contract rate of interest of 6% and interest payments to be paid semi-annually. The question is if the market rate is 10% then what would be the cash proceeds for this 12-year bond assuming all bonds were sold at auction?

2. Another question is what would be the amount of interest charged to Sleet Company during the first year the bonds were outstanding?

3. What is the total amount of interest paid during the entire life of the bonds?

Answer 1

solution 1:

Computation of bond price
Table values are based on:
n=	24
i=	5%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.31007	$5,000,000	$1,550,350
Interest (Annuity)	13.79864	$150,000	$2,069,796
Price of bonds			$3,620,146

Solution 2:

Bond Amortization Table
Semiannual interest period end	Cash interest paid	Bond Interest Expense	Discount Amortization	Unamortized Discount	Carrying Value
Issue date				$1,379,854	$3,620,146
June 30, Year 1	$150,000	$181,007	$31,007	$1,348,847	$3,651,153
Dec 31, Year 1	$150,000	$182,558	$32,558	$1,316,289	$3,683,711
Total		$363,565

Solution 3:

Total bond interest expense over the life of bond
Particulars	Amount
Amount Repaid:
24 semiannual interest payments of $150,000 each	$3,600,000.00
Par Value at Maturity	$5,000,000.00
Total Repaid	$8,600,000.00
Less: Amount borrowed	$3,620,146.00
Total bond interest expense	$4,979,854.00