On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that

Question

On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Cash Payment Effective Increase in Outstanding Interest Balance 6,015,542 6,031,164 6,047,411 6,064,307 6,081,879 6,100,154 6,119,160 Payment Balance 225,000 225,000 225,000 225,000 225,000 225,000 240,622 241,247 241,896 242,572 243,275 244,006 15,622 16,247 16,896 17,572 18,275 19,006 38 39 40 225,000 225,000 225,000 291,675 294,342 297,115 66,675 69,342 72,115 7,358,543 7,427,885 7,500,000 Required: 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective interest expense recorded over the term to maturity? 1. Face amount 2. Initial selling price 3. Term to maturity 4. Interest is determined by what approach? 5. Annual interest rate 6. Effective annual interest rate 7. Total cash interest paid 8. Effective interest expense years

Explanation / Answer

1)Face value of bonds = 7,500,000

2)Initial selling price = $ 6,015,542

3)Term to maturity = 40 semiannual months or 20 years

4)Effective interest method as the amount of interest expense varies from period to period

5)Annual interest rate = 225000 / 7500000 = .03 or 3%semiannually or (3*2 = 6% annually)

6)Effective annual rate = 240622/6015542 = .04 or 4%semiannually or (4*2 ) = 8%annually

7)Total cash interest paid :225000*40 = 9,000,000

8)Discount on bond =7,500,000- 6,015,542 = 1484458

Interest expense = interest paid +discount

            = 9,000,000+ 1,484,458

             = $ 10,,484,458

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