Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to borrow for a major expansion. The owner, Shane Jones, asks your advice on some related matters.
Requirements
1. Answer the following questions:
a. At what type of bond price will Jones Company have total interest expense equal to the cash interest payments?
b. Under which type of bond price will Jones Company's total interest expense be greater than the cash interest payments?
c. If the market interest rate is 12%, what type of bond price can Jones Company expect for the bonds?
2. Compute the price of the bonds if the bonds are issued at 89.
3. How much will Jones Company pay in interest each year? How much will Jones Company's interest expense be for the first year?