On January 1, 2016, Tennessee Harvester Corporation issued debenture bonds that
ID: 2394212 • Letter: O
Question
On January 1, 2016, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:
What is the face amount of the bonds?
What is the initial selling price of the bonds?
What is the term to maturity in years?
Interest is determined by what approach?
What is the stated annual interest rate?
What is the effective annual interest rate?
What is the total cash interest paid over the term to maturity?
What is the total effective interest expense recorded over the term to maturity?
On January 1, 2016, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:
Explanation / Answer
Answer to Part 1:
Face amount of the Bonds = $7,300,000
Answer to Part 2:
Initial Selling Price of the Bonds = $6,047,387
Answer to Part 3:
Term to Maturity in years = 40 Semi annual payment = 20 years
Answer to Part 4:
Interest is determined by Effective Interest rate, as the Interest Expenses / Effective Interest is changing for each semi-annual payment.
Answer to Part 5:
Interest Payment = Face Amount of Bonds * Stated Annual Interest Rate * Period
$292,000 = $7,300,000 * Stated Annual Interest Rate * 6/12
Stated Annual Interest Rate = 292,000 * 12/6 * 1/7,300,000
Stated Annual Interest Rate = 8%
Answer to Part 6:
Effective Interest = Outstanding Balance * Effective Annual Interest Rate * Period
$302,369 = $6,047,387 * Effective Annual Interest Rate * 6/12
Effective Annual Interest Rate = $302,369 * 12/6 * 1/ 6,047,387
Effective Annual Interest Rate = 10%
Answer to Part 7:
Total Interest paid over the term of maturity = Face amount of Bond * Stated Annual Interest Rate * Terms to maturity
Total Interest paid over the term of maturity = $7,300,000 * 8% * 20
Total Interest paid over the term of maturity = $11,680,000
Answer to Part 6:
Total Effective Interest Expense recorded over terms to Maturity = Interest paid over term of maturity + Discount on Bonds
Total Effective Interest Expense recorded over terms to Maturity = $11,680,000 + $12,712,953
Total Effective Interest Expense recorded over terms to Maturity = $24,392,953
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