Tony Hawk’s Adventure (THA) issued callable bonds on January 1, 2015. THA’s acco
ID: 2468779 • Letter: T
Question
Tony Hawk’s Adventure (THA) issued callable bonds on January 1, 2015. THA’s accountant has projected the following amortization schedule from issuance until maturity:
Date
Cash Paid
Interest
Expense
Increase in
Carrying Value
Carrying
Value
1/1/2015
$194,758
6/30/2015
$7,000
$7,790
$790
$195,548
12/31/2015
$7,000
$7,822
$822
$196,370
6/30/2016
$7,000
$7,855
$855
$197,225
12/31/2016
$7,000
$7,889
$889
$198,114
6/30/2017
$7,000
$7,925
$925
$199,039
12/31/2017
$7,000
$7,961
$961
$200,000
What is the annual market interest rate on the bonds? (Hint: Be sure to provide the annual rate rather than the six month rate.)
Question 33 options:
4%
8%
7%
3.5%
Date
Cash Paid
Interest
Expense
Increase in
Carrying Value
Carrying
Value
1/1/2015
$194,758
6/30/2015
$7,000
$7,790
$790
$195,548
12/31/2015
$7,000
$7,822
$822
$196,370
6/30/2016
$7,000
$7,855
$855
$197,225
12/31/2016
$7,000
$7,889
$889
$198,114
6/30/2017
$7,000
$7,925
$925
$199,039
12/31/2017
$7,000
$7,961
$961
$200,000
Explanation / Answer
Solution.
Since we know the coupon = 7% and we know the bonds sold at a discount to par,
Then we know the market rate must be above 7%.
The only option above 7% is B. 8%.