Question

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uestion 8 10 points Save A Livermore Company sold $1,000,000 of 6%, 10-year bonds at 96 on January 1, 2021. The bonds were dated January 1, 2021 and pay interest on June 30 and December 31. If Livermore uses the straight-line amortization, what would the total interest expense recognized for the bond issue over its full term? (Do not add dollar sign; do not add comma by yourself to your amount round the answer to the whole number)

Answer 1

Face Value of Bonds = $1,000,000

Issue Value of Bonds = 96% * Face Value of Bonds
Issue Value of Bonds = 96% * $1,000,000
Issue Value of Bonds = $960,000

Annual Coupon Rate = 6.00%
Semiannual Coupon Rate = 3.00%
Semiannual Coupon = 3.00% * $1,000,000
Semiannual Coupon = $30,000

Time to Maturity = 10 years
Semiannual Period = 20

Total Amount Paid = Semiannual Coupon * Semiannual Period + Maturity Value
Total Amount Paid = $30,000 * 20 + $1,000,000
Total Amount Paid = $1,600,000

Total Interest Expense = Total Amount Paid - Issue Value
Total Interest Expense = $1,600,000 - $960,000
Total Interest Expense = $640,000