On January 1, 2015, Vacation Destinations issues $22 million of bonds that pay i

Question

On January 1, 2015, Vacation Destinations issues $22 million of bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:

1. What is the slated annual interest rate?

2. What is the market annual interest rate?

3. What is the total cash interest paid over the term to maturity if the term of the bond is 10 years?

(1) (2) (3) (4) (5) Date Cash Paid
for Interest Interest
Expense Increase in
Carrying Value Carrying
Value 1/1/2015     $20,569,127 6/30/2015     $880,000 $925,611     $45,611       20,614,738 12/31/2015     880,000 927,663     47,663       20,662,401

1. What is the slated annual interest rate?

2. What is the market annual interest rate?

3. What is the total cash interest paid over the term to maturity if the term of the bond is 10 years?

Explanation / Answer

1. What is the stated annual interest rate?

Stated annual interest rate = Cash Paid for Interest/ Par value * 2

Stated annual interest rate = 880000/22000000 * 2

Stated annual interest rate = 8%

2. What is the market annual interest rate?

Market annual interest rate = First Interest Expense /Issue Price *2

Market annual interest rate = 925611/20569127 * 2

Market annual interest rate = 9%

3. What is the total cash interest paid over the term to maturity if the term of the bond is 10 years?

Total cash interest paid over the term to maturity if the term of the bond is 10 years = Semi Annual Interest Payment * No of payment

Total cash interest paid over the term to maturity if the term of the bond is 10 years = 880000 * (10*2)

Total cash interest paid over the term to maturity if the term of the bond is 10 years = $ 17,600,000

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