On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that
ID: 2523513 • 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 6,378,750 1 308,000 318,938 10,938 6,389,688 2 308,000 319,484 11,484 6,401,172 3 308,000 320,059 12,059 6,413,231 4 308,000 320,662 12,662 6,425,893 5 308,000 321,295 13,295 6,439,188 6 308,000 321,959 13,959 6,453,147 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 308,000 374,516 66,516 7,556,829 39 308,000 377,841 69,841 7,626,670 40 308,000 381,330 73,330 7,700,000
Explanation / Answer
1) Face amount = 7700000
2) Initial selling price = 6378750
3) Term to maturity = 20 years
4) Effective interest method
5) 308000*100/7700000 = 4%*2 = 8%
6) 318938*100/6378750 = 5%*2 = 10%
7) Total cash interest paid = 308000*40 = 12320000
8) Effective interest expense = (7700000-6378750)+12320000 = 13641250