Question

On January 1, a company issued 9%, 10-year bonds with a face amount of $90 million for $84,392,051 to yield 10%. Interest is paid semiannually. What was interest expense at the effective interest rate on June 30, the first interest date? (Enter your answers in whole dollars. Round percentage answers to 1 decimal place (e.g., 0.0234 should be entered as 2.3).)

Answer 1

Interest expense is $ 4,219,602.55

Step-by-step explanation:

The interest expense on June 30 can be computed by applying the yield to maturity of 10% to the bond issued price of $84,392,051 then adjusted for semi-annual basis by multiplying by 6 months also dividing by 12 months as highlighted below:

Interest expense=bond issue price*yield to maturity*6/12

interest expense=$84,392,051*10%*6/12

interest expense=$84,392,051*0.10*0.5=$ 4,219,602.55

The interest expense on 30 June is $ 4,219,602.55

The same interest expense amount would be recognized on 31 st December