Homework Answers
Answer:
Issue date = January 1
Face value = $75,000,000
Issue price = $63,842,205
Coupon rate = 4%
Yield = 6%
Interest paid semiannually.
Interest expense for semiannual period upto 30th Jun
Interest expense for period upto 30th June = Carrying value * Effective rate of interest / 2
= $63,842,205 * 6%/2
=$1,915,266
Cash paid = Face value * Coupon rate / 2 = $75,000,000 * 4%/2 = $1,500,000
Amortization of discount = Interest expense - Cash paid = $1,915,266 - $1,500,000 = $415,266
Bond carrying value as of 30th June = $63,842,205 + $415,266 = $64,257,471
Interest expense for semiannual period ended 31st Dec
Interest expense for period for semiannual period ended 31st Dec = Carrying value * Effective rate of interest / 2
= $64,257,471 * 6%/2
= $1,927,724
Hence Interest expense on 31st Dec annual income statement
= $1,915,266 + $1,927,724
= $3,842,990
Interest expense on 31st Dec annual income statement = $3,842,990
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