Auerbach Inc. issued 4% bonds on October 1, 2016. The bonds have a maturity date

Question

Auerbach Inc. issued 4% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 6%.

Assuming that Auerbach issued the bonds for $255,369,000, what would the company report for its net bond liability balance after its first interest payment on March 31, 2017, rounded up to the nearest thousand?

Auerbach Inc. issued 4% bonds on October 1, 2016. The bonds have a maturity date of September 30, 2026 and a face value of $300 million. The bonds pay interest each March 31 and September 30, beginning March 31, 2017. The effective interest rate established by the market was 6%.

How much cash interest does Auerbach pay on March 31, 2017?

Please show steps and calculations. Thanks.

Explanation / Answer

Solution:

Face Value = $300,000,000

Issue Price = $255,369,000

Interest Payment on March 31, 2017 = Face Value * Coupon rate *6/12 = $300,000,000 *4% * 6/12 = $6,000,000

Interest Expenses to be recorded = issue price * Market rate * 6/12 = $255,369,000 *6% *6/12 = $7,661,070

Net bond liability balance to be reported after first interest payment on March 31, 2017 = Issue Price + Interest expense - Cash Interest Payment

= $255,369,000 + $7,661,070 - $6,000,000 = $257,030,070

Cash interest on March 31, 2017 = 300,000,000 *4%*6/12 = $6,000,000

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