On July 1 2013 $1 5 million face amount of 7% 10-year bonds were issued The bond

Question

On July 1 2013 $1 5 million face amount of 7% 10-year bonds were issued The bonds pay interest on an annual basis on June 30 each year The market interest rates were slightly higher than 7% when the bonds were sold. How much interest will be paid annually on these bonds? (Enter your answer in whole dollars.) Were the bonds issued at a premium or discount? Discount Premium Will the annual interest expense on these bonds be more than equal to or less than the amount of interest paid each year? Less than More than Equal to

Explanation / Answer

Solution:

a)

Bond Interest is always paid by applying coupon rate to Par Value of bond.

Annual Interest Payment = Par Value of Bond x Annual Coupon Rate = $1,500,000 x 7% = $105,000

b)

When the market rate exceeds the coupon rate, the bond sells at a discount. The discount declines as maturity approaches.

Hence, the bonds issued at discount.

c)

Since the bonds are issued at discount.

The bond interest expenses = Bond Interest Payable + Amortized Value of Bonds Discount.

Hence, it is clear that the annual interest expenses on these bonds be MORE THAN the amount of interest paid each year.

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