Question

Starlight Drive-Ins borrowed money by issuing $3,000,000 of 7% bonds payable at 98.5.RequirementsR1. How much cash did Starlight receive when it issued the bonds payable?R2. How much must Starlight pay back at maturity?R3. How much cash interest will Starlight pay each six months?

Answer 1

1) cash at issuance 2,955,000

2) cash for maturity 3,000,000 plus 210,000 interest = 3,210,000 total cash outlay at maturity

3) cash interest 210,000

Step-by-step explanation:

1) It will receive 98.5/100 of the face value

3,000,000 x .985 = $2,955,000

2) at maturity it will still have to pay the face value regardless of the amount received for the bonds aty issuance thus; $3,000,000 We will also have to add up the interest for the last period.

3) the cash interest will be considered using the face value and the coupon rate of 7% regardless of current market rate and market price of the bond.

3,000,000 x 7% = 210,000