Stanford issues bonds dated January 1, 2015, with a par value of $500,000. The bonds' annual contract rate is 9%, and the interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $463,140.

1. What is the amount of the discount on these bonds at issuance?

2. How much total bond interest expense will be recognized over the life of these bonds?

3. Prepare the amortization of the bond discount for the first payment period, using the effective interest method to amortize the discount.

Question

Business

Anabella Graham

11 September, 09:40

Stanford issues bonds dated January 1, 2015, with a par value of $500,000. The bonds' annual contract rate is 9%, and the interest is paid semiannually on June 30 and December 31. The bonds mature in three years. The annual market rate at the date of issuance is 12%, and the bonds are sold for $463,140.

1. What is the amount of the discount on these bonds at issuance?

2. How much total bond interest expense will be recognized over the life of these bonds?

3. Prepare the amortization of the bond discount for the first payment period, using the effective interest method to amortize the discount.

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Answers (1)

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Miguel Powers · Answer 1

Discount on bond = Par value of bond - Issued price of bond = 500,000-463,140=36,860

2)

500,000*0.09 = 45,000

22,500 semiannually

Amount repaid:

Six payments (22500*6) 135,000

Add: Maturity value 500,000

Total amount repaid 635,000

Less: Amount borrowed (463,140)

Total bond interest 171,860

Total bond interest expense recognized 171,860