Question

A company issues $50,000 of 4% bonds, due in 5 years, with interest payable semiannually. Assuming a market rate of 3%, the bonds issue for $52,306. Calculate the carrying value of the bonds after the first semiannual interest payment.

Answer 1

The carrying value of the company's bonds after the first semiannual interest payment is $52,090.59.

Data and Calculations:

Face value of bonds = $50,000

Bonds Proceeds = $52,306

Bonds Premium = $2,306 ($52,306 - $50,000)

Maturity Period = 5 years

Coupon interest rate = 4%

Market interest rate = 3%

Interest Payment = Semiannually

First Semiannual Interest Payment:

Cash payment = $1,000 ($50,000 x 4% x 1/2)

Interest expense = $784.59 ($52,306 x 3% x 1/2)

Amortization of premium = $215.41 ($1,000 - $784.59)

Carrying value = $52,090.59 ($52,306 - $215.41)

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