Amortize Discount by Interest Method
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
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Amortize Discount by Interest Method
On the first day of its fiscal year, Ebert Company issued $11,000,000 of 5-year, 12% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 13%, resulting in Ebert receiving cash of $10,604,658. The company uses the interest method.
a.
1. Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.
b. Compute the amount of the bond interest expense for the first year. Round to the nearest dollar.
c. Explain why the company was able to issue the bonds for only $10,604,658 rather than for the face amount of $11,000,000.
The bonds sell for less than their face amount because the market rate of interest is ________ the contract rate of interest. Investors _______ willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).
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