1) Ramsey Corp. issued a $2,000,000 of 4% bond to yield 6% (market rate). The bo

Question

1) Ramsey Corp. issued a $2,000,000 of 4% bond to yield 6% (market rate). The bond was issued on 1/1/2000 to provide semi-annual payments and expected to mature in 10 years. The semi-annual payments are to be made every June 30 and December 31. Costs of issuing the bonds amounted to $20,000.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

a) Calculate the total interest expense recorded by Ramsey if it held the bond to maturity.

b) Assume that the bonds are retired after 4 years ( i.e., on 1/1/2004) for 98 of the par value. Calculate the gain or loss associated with this debt retirement.

Explanation / Answer

Semiannual bond. So nper = 10*2=20

Coupon = 4%.

SO PMT = 4%*2000000/2 =40000

Rate = 6%/2 = 3%

Bond issue cost $20000

(a) Int exp for 10Yrs = Bond FV*Copuon Rate*nper

= 2000000*(4%/2)*20 = 800,000

(b) AFter 4 Yrs, remianing life = 10-4=6Yrs

Returement value = 98%*2000000 = 1960000

Issue cost =2000,000 + 20000 = 2020,000

SO Loss = 1960,000-2020,000 = $(60,000)

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