On January 1, Year 6, The Corporation issued $1,000,000 face value, 20-year bonds. The bonds carry coupon interest of 6 percent per year, payable semiannually on June 30 and December 31. The bonds were initially priced on the market to yield 8 percent, compounded semiannually.
The present value of a single amount for 3% 40 periods is .30656
The present value of a single amount for 4% 40 periods is .20829
The present value of an annuity for 3% 40 periods is 23.11477
The present value of an annuity for 4% 40 periods is 19.79277
Required:
a - Compute the issue price of these bonds on January 1, Year 6.
b - Compute the amount of interest expense on these bonds for Year 6 assuming that the firm uses the effective-interest method of amortizing bond premium or discount.