You are asked to evaluate a five-year, convertible debt offering being considered by management. This offering, effective January 1, 2013, is for $40 million. It would be issued at 2% below prevailing interest rates at the time of issuance and is due on December 31, 2017 (five years after issuance). The conversion feature of the debt would allow the debt holders to convert each $1,000 of debt into 10 shares of common stock. The issuance costs are expected to total $200,000, which will primarily comprise attorney and accounting fees. The reporting entity follows IFRS. Assume the prevailing interest rate for the non-convertible bonds is 6% at the beginning of the year. How much interest expense is to be recognized and recorded for the year 2014?
You are asked to evaluate a five-year, convertible debt offering being considered by management. This offering, effective January 1, 2013, is for $40 million. It would be issued at 2% below prevailing interest rates at the time of issuance and is due on December 31, 2017 (five years after issuance). The conversion feature of the debt would allow the debt holders to convert each $1,000 of debt into 10 shares of common stock. The issuance costs are expected to total $200,000, which will primarily comprise attorney and accounting fees. The reporting entity follows IFRS. Assume the prevailing interest rate for the non-convertible bonds is 6% at the beginning of the year. How much interest expense is to be recognized and recorded for the year 2014?
Chapter6: Fixed-income Securities: Characteristics And Valuation
Section: Chapter Questions
Problem 9P
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Transcribed Image Text:You are asked to evaluate a five-year, convertible debt offering being
considered by management. This offering, effective January 1, 2013, is for $40
million. It would be issued at 2% below prevailing interest rates at the time of
issuance and is due on December 31, 2017 (five years after issuance). The
conversion feature of the debt would allow the debt holders to convert each
$1,000 of debt into 10 shares of common stock. The issuance costs are
expected to total $200,000, which will primarily comprise attorney and
accounting fees. The reporting entity follows IFRS. Assume the prevailing
interest rate for the non-convertible bonds is 6% at the beginning of the year.
How much interest expense is to be recognized and recorded for the year
2014?
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