PowerTap Utilities is planning to issue bonds with a face value of $2,400,000 an

Question

PowerTap Utilities is planning to issue bonds with a face value of $2,400,000 and a coupon rate of 6 percent. The bonds mature in 15 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. PowerTap uses the effective-interest amortization method. Assume an annual market rate of interest of 8 percent.

Required:

1. What was the issue price on January 1 of this year? (Round your final answer to whole dollars.)

2. What amount of interest expense should be recorded on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

3. What amount of cash should be paid to investors June 30 and December 31 of this year?

4. What is the book value of the bonds on June 30 and December 31 of this year? (Round your final answers to nearest whole dollar amount.)

Explanation / Answer

1.

2. Interest expense on June 30 and December 31 is 92,000

3. Amount of cash paid to investors June 30 and December 31 of this year is 72,000

4. Book value of the bonds

Face value    2,400,000 Coupon rate 6% Interest       144,000 Market rate 8% Issue price    1,800,000

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