Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,433,150. Interest is payable semiannually. Shunda’s fiscal year begins on January 1. The company uses the interest method. Part B and C questions B. Determine the bond interest expense for the first year. Round to the nearest dollar. Annual interest paid $fill in the blank 8232acf7601cff6_1 Less premium amortized fill in the blank 8232acf7601cff6_2 Interest expense for first year $fill in the blank 8232acf7601cff6_3 c. Explain why the company was able to issue the bonds for $32,433,150 rather than for the face amount of $30,000,000. The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).
Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,433,150. Interest is payable semiannually. Shunda’s fiscal year begins on January 1. The company uses the interest method.
Part B and C questions
B. Determine the bond interest expense for the first year. Round to the nearest dollar.
| Annual interest paid | $fill in the blank 8232acf7601cff6_1 |
| Less premium amortized | fill in the blank 8232acf7601cff6_2 |
| Interest expense for first year | $fill in the blank 8232acf7601cff6_3 |
c. Explain why the company was able to issue the bonds for $32,433,150 rather than for the face amount of $30,000,000.
The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).
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