P 14-4

On January 1, 2018, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below:

Payment	Cash Payment	Effective Interest	Increase in Balance	Outstanding Balance
				6,627,273
1	320,000	331,364	11,364	6,638,637
2	320,000	331,932	11,932	6,650,569
3	320,000	332,528	12,528	6,663,097
4	320,000	333,155	13,155	6,676,252
5	320,000	333,813	13,813	6,690,065
6	320,000	334,503	14,503	6,704,568
-	-	-	-	-
-	-	-	-	-
-	-	-	-	-
38	320,000	389,107	69,107	7,851,247
39	320,000	392,562	72,562	7,923,809
40	320,000	396,191	76,191	8,000,000

1. What is the face amount of the bonds?

2. What is the initial selling price of the bonds?

3. What is the term to maturity in years?

ANWSER: 20 years (40 semi-annual payments)

4. Interest is determined by what approach?

5. What is the stated annual interest rate?

6. What is the effective annual interest rate?

ANSWER: 10% ($331,364 / $6,627,273) X 2 =10%

7. What is the total cash interest paid over the term to maturity?

8. What is the total effective interest expense recorded over the term to maturity?

ANSWER: $14,172,727 ($12,800,000* + ($8,000,000 - $6,627,273) *$12,800,000 = $320,000 X 40