Final answer:
The annual interest expense for an 11%, 4-year, $100,000 bond with a premium of $12,928 is $7,768, which is obtained after adjusting the annual interest payment by the amount of the premium amortized annually. None of the provided options match the calculated expense, indicating an error in the options.
Step-by-step explanation:
The question pertains to calculating the annual interest expense for a bond issued at a premium. The bond in question has a face value of $100,000, a premium of $12,928, and an interest rate of 11% over 4 years.
To find the interest expense, first calculate the annual interest payment, which is 11% of the $100,000 face value:
- $100,000 x 0.11 = $11,000
Next, spread the premium over the life of the bond to find how it affects the interest expense:
- $12,928 premium / 4 years = $3,232 per year
Then, subtract the annual premium amortization from the annual interest payment to find the adjusted interest expense:
- $11,000 - $3,232 = $7,768
So, the annual interest expense for the bond is $7,768. However, none of the provided options (a) $4,500, (b) $5,000, (c) $5,500, or (d) $6,000 match the calculated interest expense of $7,768. There must be an error in the question or the options provided.