On January 1, 2016, Tennessee Harvester Corporation issued debenture bonds that
ID: 2460802 • 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?
Payment Cash
Payment Effective
Interest Increase in Balance Outstanding
Balance 7,290,000 1 352,000 364,500 12,500 7,302,500 2 352,000 365,125 13,125 7,315,625 3 352,000 365,781 13,781 7,329,406 4 352,000 366,470 14,470 7,343,876 5 352,000 367,194 15,194 7,359,070 6 352,000 367,954 15,954 7,375,024 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 38 352,000 428,018 76,018 8,636,373 39 352,000 431,819 79,819 8,716,192 40 352,000 435,808 83,808 8,800,000
Explanation / Answer
Answer 1
The face amount of the bonds is the final balance after 40th Payment ie 8,800,000.
Answer 2
The initial selling price of the bonds is the balance before the first Payment ie 7,290,000.
Answer 3
What is the term to maturity in years is 40/2 = 20 Years
Answer 4
Effective Interest Method is used because interest amount is different in each period.
Answer 5
The stated annual interest rate is (352000/8800000)*2 = 0.08 or 8%
Answer 6
The effective annual interest rate is (364500/7290000)*2 = 0.10 or 10%
Answer 7
The total cash interest paid over the term to maturity is 352000*40 = 14,080,000
Answer 8
Total effective interest expense recorded over the term to maturity
The stated annual interest rate is (352000/8800000)*2 = 0.08 or 8%
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