On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that

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:

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?

Payment Cash
Payment Effective
Interest Increase in
Balance Outstanding
Balance 6,015,542 1 225,000 240,622 15,622 6,031,164 2 225,000 241,247 16,247 6,047,411 3 225,000 241,896 16,896 6,064,307 4 225,000 242,572 17,572 6,081,879 5 225,000 243,275 18,275 6,100,154 6 225,000 244,006 19,006 6,119,160 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 225,000 291,675 66,675 7,358,543 39 225,000 294,342 69,342 7,427,885 40 225,000 297,115 72,115 7,500,000

Explanation / Answer

1. Face amount of bonds = $7,500,000

2. Initial selling price of bonds = $6,015,542

3. Term to maturity = 40 semi-annual payments/2 = 20 years

4. Interest is determined by Effective Interest approach

5. Stated annual interest rate = ($225,000/$7,500,000) * 2 = 0.06 = 6%

6. Effective annual interest rate = ($240,622/$6,015,542) * 2 = 0.08 = 8%

7. Total cash interest = $225,000 * 40 payments = $9,000,000

8. Total effective interest expense = ($7,500,000-$6,015,542) + $9,000,000 = $10,484,458

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