Question

On January 1, 2018, 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

6,286,574

1 370,000 377,194 7,194 6,293,768

2 370,000 377,626 7,626 6,301,394

3 370,000 378,084 8,084 6,309,478

4 370,000 378,569 8,569 6,318,047

5 370,000 379,083 9,083 6,327,130

6 370,000 379,628 9,628 6,336,758

~ ~ ~ ~ ~

~ ~ ~ ~ ~

~ ~ ~ ~ ~

38 370,000 432,132 62,132 7,264,327

39 370,000 435,860 65,860 7,330,187

40 370,000 439,813 69,813 7,400,000

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?

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:- 1)-The face amount of the bonds is $7400000.

2)- The initial selling price of the bonds is $6286574.

3)- The term to maturity in years is 20 years.

4)- Interest is determined by Effective Interest rate approach.

5)- The stated annual interest rate is 10%.

Explanation:- Annual interest rate is {($370000/$7400000*100)*2}

                  =10%

6)- The effective annual interest rate is 12%.

Explanation:- Effective Annual interest rate is ($377194/$6286574*100)*2

                  =12%

7)- The total cash interest paid over the term to maturity is $370000*40 = $14800000.

8)- The total effective interest expense recorded over the term to maturity is

   =$15913426

Explanation:-Effective interest expense (ie-Total cash interest + Discount)

= {$14800000+($7400000-$6286574)}

=$15913426