How much interest expense will Winston recognize over the life of the bonds?

QUESTION

Winston Company issued $1,000,000 of 10-year bonds on December 31, 2006. The bonds have a coupon rate of 12%, with interest paid semiannually on June 30 and December 31. The bonds were priced to yield 14%, and Winston received $893,640 in proceeds. How much interest expense will Winston recognize over the life of the bonds?
a. $1,093,640
b. $1,200,000
c. $1,306,360
d. $1,400,000
e. $1,416,360
Correct answer is: C. Total interest expense over the life of the bonds = Total coupon payments + Initial discount. In this case, each coupon payment will be $60,000 (i.e., $1,000,000 12%/year year), and the total coupon payments will be $60,000

20 = $1,200,000. The initial discount is $1,000,000 $893,640 = $106,360. So, the total interest expense over the life of the bonds = $1,200,000 + $106,360 = $1,306,360 .

ANSWER:

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