ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar) ?

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Business

Baylee Mcguire

2 June, 09:47

ABC Corporation issued $100,000 of 10%, 5-year bonds on January 1, 2018, for $92,280. The market interest rate when the bonds were issued was 12%. Interest is paid semi-annually on January 1 and July 1. Using the effective-interest amortization method, how much cash will ABC pay bondholders on July 1, 2018 (rounded to the nearest dollar) ?

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Damon Lee · Answer 1

ABC will pay bond holders $536.80 on July 1

Explanation:

The carrying value of the bonds=$92,280

Market value=$100,000

Meaning the bonds were issued at a discount of;

Discount=Market value-carrying value of the bonds

Discount = (100,000-92,280) = $7,720

From January 1 to July 1 is exactly 6 months.

Cash paid after 6 months=Semiannual interest payments

Semiannual interest payments = (10%/2) * 100,000 = (0.05*100,000) = 5,000

Interest expense=92,280 * (12%/2) = (0.06*92,280) = 5,536.80

Discount amortized=Interest expense-cash paid

Discount amortized = (5,536.80-5,000) = 536.80

ABC will pay bond holders $536.80