On January 1, 2021 Conway Corp. issued bonds that had an aggregate face value of $100,000,000 and a coupon of 2.0%, with cash interest payable annually at the end of each year. At the time the bonds were issued the market required rate of return for bonds of similar risk was 6.0%. The company received cash proceeds of $80,000,000. If Conway instead had issued zero coupon bonds with a face value of $100 million, a 6-year maturity and a yield to maturity of 6%.
a) How much cash did Conway receive from the bond issue? Show the journal entries relating to the bond issue.
b) What was the GAAP interest expense on these bonds in 2021 On December 31, 2021 the market rate of interest for the bonds issued on January 1, 2021 had dropped to 2%.
c) What was the Present Value of these bonds on December 31, 2021?
d) Some charitable entities can issue bonds which are tax-exempt, and the purchaser of the bond does not have to pay income tax on the interest income. If such an entity issued bonds identical in all other respects to those of Conway Corp. would it expect to receive higher or lower proceeds from the bond issuance than Conway did? Why?