Bond computations P2 Enviro Company issues 8%, 10-year bonds with a par value of
ID: 2473897 • Letter: B
Question
Bond computations P2 Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%,. which implies a selling price of 87 1/2. The straight-line method is used to allocate interest expense. What are the issuer's cash proceeds from issuance of these bonds? What total amount of bond interest expense will be recognized over the life of these bonds? What is the amount of bond interest expense recorded on the first interest payment date?Explanation / Answer
Ans;
What is the FACE value of the BONDS $250 000
What is the Stated Interest rate of the bonds 8%
Therefore, they will pay 250,000 *.08 per year = 20,000
for 10 years= 200,000 interest expense. total
Now, its 20,000 per year, but semi-annual...so its 10,000
every six months
Now, I am going to explain something. When the person BUYS the bonds, they will not PAY 250,000
They will buy the bonds at a discount. they will only PAY
250,000 *.875= 218750. However, they will receive interest
on the full stated value of the bonds, ant the stated rate of 8%
Don't get these two ideas mixed up. The Price of the bond is lower becuase the Market is offering 10%. These Bonds are only offering 8%. Therefore, to make up the difference, the bonds are sold at a discount price. Mathematically, the price is found by discounting the bond and the principal at the MARKET rate of interest. If you discount using a Higher rate, the present value goes down...Hence the bonds are SOLD at a discount.