Question

Campbell Inc. produces and sells outdoor equipment. On July 1, 20Y1, Campbell issued $30,000,000 of 10-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $31,951,110. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Answer 1

Answer:Interest payment = $1,350,000, Total cash paid = $57,000,000

Explanation:

Coupon Face value = $30,000,000, coupon interest rate = 9% = 9÷100 = 0.09, period = 10 years since the payment is semi - annually , period is multiplied by 2 = 10 ×2 =20, semi annually = 6/12

To calculate the interest payment, we use the formula

Face value of the bond × coupon interest rate × semi- annual payment

= 30,000,000 × 0.09 × 6/12

= $1,350,000

To calculate the total cash paid to investors over the life of the bond, we use

Interest payment × period

Since period = 20

1,350,000 × 20

= $27,000,000

Therefore the total cash paid = $30,000,000 + $27,000,000

= $57,000,000

Campbell Inc receive a premium more cash than the principal amount from the purchaser .The purchaser is willing to pay more because the purchaser of the bond will receive interest payment of $1,350,000