Question

The carrying value of a $500,000, 4 year note with an 8 percent face rate (paid semiannually) that was issued to yield 9 percent is $491,031.19. What is the interest expense for the next interest period? A) $20,000.00 B) $19,641.25 C) $22,096.40 D) $44,192.81

Answer 1

The answer is $22096,40

Step-by-step explanation:

The annual interest expense is calculated: Nominal Value * yield rate*carrying value/nominal value. Because this note is paid semiannually, the formula is Nominal value * yield rate/2, where nominal value is equal to the face value ($500,000), and the yield rate = 9%. Because the carrying value is less than the nominal value, the cost for the company is less than the nominal expense.

So, the interest expense is $500,000 * 0.09/2 * 491,031.19/500,000 = 22,096,40