Question

qs 10-9 (algo) straight-line: discount bond computations lo p2
enviro company issues 8%, 10-year bonds with a par value of $220,000 and semiannual interest payments. on the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 ½. the straight-line method is used to allocate interest expense.
complete this question by entering your answers in the tabs below.
required 1 required 2 required 3
what total amount of bond interest expense will be recognized over the life of these bonds?
note: round final answers to the nearest whole dollar amount.
total bond interest expense over life of bonds:
amount repaid:
payments of
par value at maturity
total repayments
less amount borrowed (cash proceeds from part 1) 0
total bond interest expense $ 0

Explanation:

Step 1: Calculate total interest payments

The bond has a 10 - year term with semiannual payments, so the number of periods \(n = 10\times2=20\). The annual coupon rate is 8%, so the semiannual coupon rate \(r=\frac{8\%}{2} = 4\%\). The par value \(F = 220000\). The semiannual interest payment \(I=F\times r=220000\times0.04 = 8800\). The total interest payments over the life of the bond is \(I_{total}=8800\times20=176000\).

Step 2: Calculate the discount on the bond

The selling price is \(87\frac{1}{2}\%\) of par value, so the selling price \(P = 220000\times0.875=192500\). The discount on the bond \(D=F - P=220000 - 192500 = 27500\).

Step 3: Calculate total bond interest expense

The total bond interest expense is the sum of total interest payments and the discount on the bond. So \(Total\ interest\ expense=176000 + 27500=203500\).

Answer:

\(203500\)