Question

Subject Test
Note:
You are attempting question 3 out of 12
Global Company issued $1,200,000, 10-year bonds for $1,361,042 on January 1, 2012. The
stated interest rate on bonds is 10% and the market interest rate is 8%. If the interest is paid
annually, then the interest expense for the year 2013 would be nearest to:
a. $120,000
b. $107,994
c. $108,883
d. $110,000
Answer
OA​

Answer 1

Answer:

1,20,000

Explanation:

Answer 2

Answer:

b. 107,994

Explanation:

Market interest rate is 8%

Interest paid annually 120,000 (1,200,000 x 10%)

PV 8% for total ten years 6.71 (Sum of PV of 10 years 100/108)

Interest to be paid 120,000 x 6.71

= 805,200 (A)

PV 8% for tenth year 0.4632

Redemption value 1,200,000 x 0.4632

= 555,840 (B)

A+B = 1,361,040

2012 (on Dec 2012)

1,361,040 x 8% = 108,883

2013 (on Dec 2103)

[ 1,361,040 + 108,883 - 120,000 (Interest paid)] x 8%

= 1,349,923 x 8%

= 107,994