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A company issues $20,000,000, 7
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December 31. Using effective-interest amortization, how much interest expense will be recognized in 2007?
A)780,000
B)1,560,000
C)1,568,498
D)1,568,332
Expert Solution
Cash interest For Semi Annual period
= 20000000 * 7.8% * ( 6/12 )
= $ 780000
Maarket rate of interest = 8% Per Annum
For Semi Annual Period = 8/2
= 4 %
no of years = 20
no of interest Payments = 20 * 2
n = 40
Present Value of bond
| total values based on | |||
| N = | 40 | ||
| I = market rate of interest = 8/2 | 4.00% | ||
| Cash Flow | Table Value | amount | Present Value ( table Value * Amount ) |
| par Value PVF ( i= 4% , n=40 ) | 0.20829 | 20000000 | 4165800 |
| interest Annuity PVAF ( i= 4% , n= 40 ) | 19.79277 | 780000 | 15438360.60 |
| Issue Price of the bond | 19604160.60 | ||
Issue price of the bond = $ 19604161
Interest Expense
= Carrying value * market rate of interest * ( 6/12)
= 19604161 * 8% * ( 6/12 )
= $ 784166.44
Discoint Amortization on june 30
= interest Expense - Cash interest
= 784166 - 780000
= $ 4166
interest expense on Dec 31st 2017
= ( 19604161 + 4166 ) * 8% * ( 6/12 )
= $ 784333.08
total interest Expense
= 784166 + 784333
= $ 1568499 ( approx )
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