1. 2. 3. Enviro Company issues 8%, 10-year bonds with a par value of $330,000 an
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Question
1.
2.
3.
Enviro Company issues 8%, 10-year bonds with a par value of $330,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 12. The straight-line method is used to allocate interest expense. 1. Using the implied selling price of 87 /2, what are the issuer's cash proceeds from issuance of these bonds? Cash proceeds 2. What total amount of bond interest expense will be recognized over the life of these bonds? Total bond interest expense over life of bonds: Amount repaid: payments of Par value at maturity Total repayments Less amount borrowed (from part 1) Total bond interest expense 0 0 3. What is the amount of bond interest expense recorded on the first interest payment date? Bond interest expenseExplanation / Answer
Par value per bond - $100
No. of bonds – 3,300
Selling Price of Bond - $87.5
Cash Proceeds – 3,300 * $ 87.5 = 288,750
20 Payments of interest $13,200 = $264,000
Par Value at Maturity = $330,000
Total Repayment = $594,000
Less Amount Borrowed = $288,750
Total Bond Interest Expense = $305,250
Total Bond Interest Expense = $305,250
No of Repayments – 20
Thus, Interest exp per payment date = $15,262.5…..Based on straight line method.
2.1)
Market Rate
Initial Cash Proceeds
Amount of annual payment
a
4%
$380,000
$85,358
b
6%
$380,000
$90,210
c
8%
$380,000
$
3.1) Require the maturity period of bonds to calculate the interest payable.
Market Rate
Initial Cash Proceeds
Amount of annual payment
a
4%
$380,000
$85,358
b
6%
$380,000
$90,210
c
8%
$380,000
$
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