Hoover Company sells $1,000,000 of ten-year, 8% bonds with yield to maturity at

Question

Hoover Company sells $1,000,000 of ten-year, 8% bonds with yield to maturity at 10% on January 1, 2014. The bonds pay interest annually on December 31. In the following questions, use effective interest rate method. ('8% bonds' means 8% coupon rate.) All the questions in this Quiz 6 are based on this bond. How much does Hoover finance by issuing the bonds? (Assume there is no other expenses.) (Format: $x,xxx,xxx or Sxxx,xx) Answer: What is the amount of cash interest paid in 2014 on the bonds? (Format: Sxxx,xxx or Sxx,xxx) Answer What is the bond interest expense for 2014? (Format: $xxx,xxx or Sxx,xxx) Answer

Explanation / Answer

1)Price of Bond = [PVA10%,10*Interest]+[PVF10%,10*Face value]

          =[6.14457*80,000]+ [ .38554*1,000,000]

          = 491565.6+ 385540

            = 877,106

Funds raised : $ 877,106

2)cash interest paid : 1,000,000*.08 =$80,000

3)Interest expense =issue price*yield

        = 877106*.10

       = $ 87,711

4)Discount amortised :87711-80000= 7711

bond carrying value : Issue price+discount amortised

         877,106 +7711

        = $ 884817

5)cash interest paid = 80000

6)interest expense : carying value *yield

      = 884817 *.10 = $ 88,482

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