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Annual versus semiannual interest payments

Gardner Co. issued bonds with a face value of $100,000 on January 1, 2007. The bonds had a 6 percent stated rate of interest and five year term. The bonds were issued at face value.

A. What total amount of interest will Gardner pay in 2007 if bond interest is paid annually each December 31?

B. What total amount of interest will Gardner pay in 2007 in bond interest is paid semiannually each June 30 and Dec 31?

C. Write a memo explaining which option Gardner would prefer.

Solution Preview

a. year 1: $100,000 X 6% = $6,000
year 2: $106,000 X 6% = $6,360
year 3: $112,360 X 6% = $6,742
year 4: $119,102 X 6% = $7,146
year 5: $126,248 X 6% = $7,575
total: $133,823

b. year 1 jun: $100,000 X 3% = $3,000
year 1 dec: ...

Solution Summary

Gardner Co. issued bonds with a face value of $100,000 on January 1, 2007. The bonds had a 6 percent stated rate of interest and five year term. The bonds were issued at face value.

$2.19