Reference no: EM132419852
If the Deer Valley Ski Association borrows $1,000,000 by issuing, at par, 20-year, 10% bonds with semiannual coupons, the total interest expense over the life of the issue is $2,000,000 (= 20 x .10 x $1,000,000). If Deer Valley undertakes a 20-year mortgage or note with an implicit borrowing rate of 10%, the annual payments are $1,000,000/8.51356 = $117,460. The total mortgage payments are $2,349,200 ( = 20 x $117,460) and the total interest expense over the life of the note or mortgage is $1,349,200 ( = $2,349,200 - $1,000,000).
Why are the amounts of interest expense different for these two means of borrowing for the same length of time at identical interest rates?
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