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Colwood Manufacturing Inc
Colwood Manufacturing Inc. has $280,000 of 13% debenture bonds outstanding. The bonds were issued at 109 in 2017 and mature in 2037.
Requirements:
1. How much cash did Colwood receive when it issued these bonds?
2. How much cash in total will Colwood pay the bondholders through the maturity date of the bonds?
3. Take the difference between your answers to Requirements 1 and 2. This difference represents Colwood's total interest expense over the life of the bonds.
4. Compute Colwood's annual interest expense by the straight-line amortization method. Multiply this amount by 20. Your 20-year total should be the same as your answer to Requirement 3.
Expert Solution
1.
Issue value of bonds = Face value of bonds * Bond issued at
Issue value of bonds = 280,000 * 109%
Issue value of bonds = 280,000 * 1.09
Issue value of bonds = $305,200
2.
Annual coupon = Face value of bonds * Coupon rate
Annual coupon = 280,000 * 13%
Annual coupon = 280,000 * 0.13
Annual coupon = $36,400
No. of coupon payments 2037 - 2017
No. of coupon payments = 20
Total cash payment = Face value of bonds + (No. of coupon payments * Annual coupon)
Total cash payment = 280,000 + (20 * 36,400)
Total cash payment = 280,000 + 728,000
Total cash payment = $1,008,000
3.
Total interest expense = Total cash payment - Issue value of bonds
Total interest expense = 1,008,000 - 305,200
Total interest expense = $702,800
4.
Annual interest expense by Straight−line amortization = (Annual coupon − (Issue value of bonds − Face value of bonds)No. of coupon payments) × No. of coupon paymentsAnnual interest expense by Straight−line amortization = (36,400 − (305,200 − 280,000)20) × 20Annual interest expense by Straight−line amortization = 35,140 × 20Annual interest expense by Straight−line amortization = $702,800
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