Question

ellis company issues 8.0%, five-year bonds dated january 1, 2027, with a $530,000 par value. the bonds pay interest on june 30 and december 31 and are issued at a price of $575,210. the annual market rate is 6% on the issue date.
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calculate the total bond interest expense over the bonds life.
total bond interest expense over life of bonds:
amount repaid:
payments of
par value at maturity 530,000
total repaid 530,000
less amount borrowed
total bond interest expense $ 530,000

Explanation:

Step1: Calculate semiannual interest payment

Semiannual interest rate = $\frac{8.0\%}{2} = 4\%$
Semiannual payment = $530,000 \times 4\% = 21,200$

Step2: Count total interest payments

Number of payments = $5 \text{ years} \times 2 = 10$

Step3: Calculate total interest paid

Total interest = $21,200 \times 10 = 212,000$

Step4: Calculate total amount repaid

Total repaid = Total interest + Par value = $212,000 + 530,000 = 742,000$

Step5: Calculate total bond interest expense

Total bond interest expense = Total repaid - Amount borrowed = $742,000 - 575,210 = 166,790$

Answer:

Total bond interest expense over life of bonds:
10 payments of $\$21,200$	$\$212,000$
Par value at maturity	$\$530,000$
Total repaid	$\$742,000$
Less amount borrowed	$\$575,210$
Total bond interest expense	$\$166,790$