Chapter 11 sample test
1. The First Corporation issued a $1,000, 6%, 10-year bond on January 1. Calculate the
total cash amount the corporation will pay out over the life of the bond.
The key to this problem is to recognize that over the life of a bond, a company's cash
payments consist of the bond principal and interest. The company's total cash payments
will be $1,600.
Bond principal
$1,000
Bond interest ($1,000 x .06 x 10)
$600
Total cash payments
$1,600
See text exercise 11.1 for similar material.
2. Calculate the Second Corporation’s 3-year cost of borrowing for the following bond:
$2,000 principal, 7% annual interest, 3-year life. Cash received by the corporation when
it issued the bond was $2,000.
The key to this problem is to recognize that the total cost of borrowing is the difference
between the cash paid out over the life of a bond and the cash received when the bond is
issued. The company's 3-year cost of borrowing will be $420. Note the bond was
issued at its principal amount.
Cash receipts
$2,000
Cash payments
Bond principal
$2,000
Bond interest ($2,000 x .07 x 3)
$420
Total cash payments
$2,420
3-year cost of borrowing
$420
See text exercise 11.2 for similar material.
3. Calculate the Third Corporation’s 3-year cost of borrowing for the following bond:
$3,000 principal, 7% annual interest, 3-year life. Cash received by the corporation when
it issued the bond was $3,100.
The key to this problem is to recognize that the total cost of borrowing is the difference
between the cash paid out over the life of a bond and the cash received when the bond is
issued. The company's 3-year cost of borrowing will be $530. Note the bond was
issued at a $100 premium.
Cash receipts
$3,100
Cash payments
Bond principal
$3,000
Bond interest ($3,000 x .07 x 3)
$630
Total cash payments
$3,630
3-year cost of borrowing
$530