Cybernetics Inc. issued $60 million of 5% three-year bonds, with coupon paid at the end of every

Question:

Cybernetics Inc. issued $60 million of 5% three-year bonds, with coupon paid at the end of every year. The effective interest rate at the beginning of Years 1, 2, and 3 was 8%, 5%, and 2%.

Required:

a. Determine what Cybernetics would have raised from the bond issue.

b. Assume Cybernetics decides to account for the bonds using the amortized cost method. Determine the interest and bond amortization for each of the three years.

c. Assume Cybernetics decides to account for the bonds using the fair value method. Determine the interest, un realized gain/loss, and total expense for each of the three years.

d. Explain why the amounts charged to income every year differ under the two methods.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...