Town Bank has $100,000 of 4% debenture bonds outstanding. The bonds were issued at 106 in 2018 and mature in 2038. The bonds have annual interest payments.

Requirements

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

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

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

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