The interest expense in the 1st year is $11,002.50.
Here, we are to calculate the interest expense in the 1st year using the straight line method of amortization.
Face Value of Bonds = $163,000
Issue Value of Bonds = $163,000 * 97%
Issue Value of Bonds = $158,110
Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $163,000 - $158,110
Discount on Bonds = $4,890
Annual Coupon Rate = 6.00%
Annual Coupon = Annual Coupon Rate * Face Value of Bonds
Annual Coupon = 6% * $163,000
Annual Coupon = $9,780
Time to Maturity = 4 years
Annual Amortization of Discount = Discount on Bonds / Time to Maturity
Annual Amortization of Discount = $4,890 / 4
Annual Amortization of Discount = $1,222.5
Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $9,780 + $1,222.5
Annual Interest Expense = $11,002.50
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