On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that

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: Cash Payment Interest Effective Increase in Outstanding Balancee Balance 7,306,018 7,314,379 7,323,242 7,332,637 7,342,595 7,353,151 7,364,340 Payment 430,000 430,000 430,000 430,000 430,000 430,000 438,361 438,863 439,395 439,958 440,556 441,189 8,361 8,863 9,395 9,958 10,556 11,189 2 38 39 40 430,000 430,000 430,000 502,207 506,540 511,133 72,207 76,540 81,133 8,442,327 8,518,867 8,600,000 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? 1 Face amount 2. Initial selling price 3. Term to maturity 4. Interest is determined by what approach? 5. Annual interest rate 6. Effective annual interest rate 7.Total cash interest paid 8. Effective interest expense years

Explanation / Answer

1 Face amount = $8600000 2 Initial selling price = $7306018 3 Term to maturity = 20 years 4 Interest is deermiend by effective interest approach 5 Stated annual interest rate = 430000/8600000*2= 10% 6 Effective annual interest rate = 438361/7306018*2= 12% 7 Total cash interest paid = 430000*40= $17200000 8 Total effective interest expense = 17200000+(8600000-7306018)= $18493982

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