Clayton Bank has $400,000 of 3% debenture bonds outstanding. The bonds were issued at 102 in 2014 and mature in 2034.

Requirements

1. How much cash did Clayton Bank receive when it issued these bonds?

2. How much cash in total will Clayton Bank pay the bondholders through the maturity date of the bonds?

3. Take the difference between your answers to requirements 1 and 2. This difference represents Clayton Bank’s total interest expense over the life of the bonds.

4. Compute Clayton Bank’s annual interest expense by the straight-line amortization method. Multiply this amount by 20. Your 20-year total should be the same as your answer to requirement 3.