Enviro Company issues 8.00%, 10-year bonds with a par value of $380,000 and semi
ID: 2471596 • Letter: E
Question
Enviro Company issues 8.00%, 10-year bonds with a par value of $380,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 5.00%, which implies a selling price of 126 5/8. The straight-line method is used to allocate interest expense. What are the issuer’s cash proceeds from issuance of these bonds? What total amount of bond interest expense will be recognized over the life of these bonds? What is the amount of bond interest expense recorded on the first interest payment date?
Explanation / Answer
Nominal interest rate on the bonds =8%.
Years to maturity of the Bond =10 years. as coupon payment is semi annual n=10*2 =20.
Par value of the bond=380,000.
Coupon payment = semi annual.=$380,000*8%/2 =$15,200.
market rate of interest for the bonds=5%.
Current market price of the bonds=126 5/8. (but this is not the correct price).
Implied selling price can be calulated by using PV funtion of excel.
PV(rate,nper,pmt,fv).
Rate=5%/2 =2.5% as the interest payment frequency is semi annual.
Nper = 10*2 =20 times interest is paid before the maturity date.
pmt is the periodic interest payment =$380,000 *8%/2=$15,200.
FV=$380,000.
Substituting these values in the formula =PV(.025,20,15200,380,000) =$468,858.23.
Therefore, implied selling price=$468,858.23/3800
=$123.38.
Premium ammortization is made using straight line method.
Issuer cash proceeds from the issuance of the bonds = $468,858.23 (as calculated above)
Total amount of interest expense that is recognized over the life of the bond is calculated as follow:
Bond premium is ammortized strainght line,so, bond premium is to be divided by 20, i.e., =($468,858.23 - $380,000)/20=$88,858/20
=$4,442.9
Bond interest expense per interest period = Interest for the period - Bond premium ammortization amount
=($380,000*8%/2) -$4,442.9
=$15,200 - $4,442.9
=10,757.10.
Therefore, interest expense for the entire bond issue =10,757.10. *20
=$215,142.
Bond interest payment for the first interest payment is $10,757.10 (as calculated above)
There
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