On January 1, 2018, Debtor Corporation issued $2,000,000 of 20-year, 8% bonds at 96, when the market rate of interest was 8.5%. The bonds pay interest annually on December 31. The company uses the effective interest method of amortization. How much cash will bondholders receive on December 31, 2018, the first interest payment date?

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Business

Emma Leblanc

4 November, 20:09

On January 1, 2018, Debtor Corporation issued $2,000,000 of 20-year, 8% bonds at 96, when the market rate of interest was 8.5%. The bonds pay interest annually on December 31. The company uses the effective interest method of amortization. How much cash will bondholders receive on December 31, 2018, the first interest payment date?

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Lexi Good · Answer 1

The bonholders will receive 160,000 in cash on December 31th, 2018

Explanation:

The cash proceeds will be the same regardless of the method of amortization

Face Value x interest rate = cuopon payment

2,000,000 x 8% = 160,000

The bonholders will receive 160,000 in cash on December 31th, 2018

The market rate will be use to calculate the amortization on the bond.

For the cuopon payment, we will always use the bond interest rate and the face value.