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21 July, 08:07

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.

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  1. 21 July, 08:36
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    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
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