On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that
ID: 2340813 • Letter: O
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 Effective
Interest Increase in
Balance Outstanding
Balance 5,774,920 1 216,000 230,997 14,997 5,789,917 2 216,000 231,597 15,597 5,805,514 3 216,000 232,221 16,221 5,821,735 4 216,000 232,869 16,869 5,838,604 5 216,000 233,544 17,544 5,856,148 6 216,000 234,246 18,246 5,874,394 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 216,000 280,008 64,008 7,064,202 39 216,000 282,568 66,568 7,130,770 40 216,000 285,230 69,230 7,200,000
Explanation / Answer
Answer 1.
Face Amount = $7,200,000
Answer 2.
Initial Selling Price = $5,774,920
Answer 3.
Number of semiannual coupons = 40
Term to Maturity = 20 years
Answer 4.
Effective interest is increasing by each payment, so interest is determined by effective interest method.
Answer 5.
Cash Payment = $216,000
Semiannual Coupon Rate = Cash Payment / Face Amount
Semiannual Coupon Rate = $216,000 / $7,200,000
Semiannual Coupon Rate = 3%
Annual Coupon Rate = 2 * 3%
Annual Coupon Rate = 6%
Answer 6.
Interest Expense on 1st Payment = Semiannual Interest Rate * Carrying Value before 1st Payment
$230,997 = Semiannual Interest Rate * $5,774,920
Semiannual Interest Rate = 4%
Annual Interest Rate = 2 * 4%
Annual Interest Rate = 8%
Answer 7.
Total Cash Interest Paid = Semiannual Cash Payment * Number of semiannual coupon payments
Total Cash Interest Paid = $216,000 * 40
Total Cash Interest Paid = $8,640,000
Answer 8.
Total Cash Paid = Total Cash Interest Paid + Maturity Value
Total Cash Paid = $8,640,000 + $7,200,000
Total Cash Paid = $15,840,000
Total Interest Expense = Total Cash Paid - Amount borrowed
Total Interest Expense = $15,840,000 - $5,774,920
Total Interest Expense = $10,065,080