Check your answer
Write your response and explain your reasoning.
Harbor Systems issues a $1,000,000 bond on an interest date. The bond matures after three years, pays 8 percent annual stated interest semiannually, and has six coupon periods. An approved source supplies a 6 percent nominal annual market yield with semiannual compounding. Harbor also pays $12,000 of costs that are supplied as qualifying debt issuance costs.
Build the opening and first-period schedule:
- Map the contractual principal, coupon cash, periods, and matched market rate.
- Price the coupon and principal streams and explain the premium direction.
- Bridge issue price through issuance costs to opening net carrying amount.
- Use the solved cost-adjusted yield to compute first-period interest expense, carrying-amount change, and ending carrying amount.
- Explain why neither the premium nor the issuance costs change face amount or the $40,000 contractual coupon.
Compare your reasoning with the worked answer
Six $40,000 coupons and $1,000,000 principal discounted at 3 percent per half-year produce a $1,054,171.91 issue price and $54,171.91 premium. After $12,000 of supplied qualifying issuance costs, opening net carrying amount is $1,042,171.91. The unchanged cash flows solve to a 3.2159362965 percent semiannual net yield. First-period interest expense is $33,515.58, the carrying amount decreases by $6,484.42, and ending carrying amount is $1,035,687.50.