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Problem: White Oaks Corporation issues $10,000 face value, 10% stated rate, 2-year bonds for proceeds of $9,654. Cash interest is paid semiannually at the rate of 5% semiannual interest. The semi-annual yield (effective rate) on the bond is 6%. Answer the following questions and show all calculations.
Required:
Question 1: Write the amount of cash returned to the investors due to the maturity of the bond.
Question 2: Calculate the interest expense that would be recorded by White Oaks on the first interest payment date.
Question 3: Calculate the cash interest the investor will always receive on a semiannual basis.
Question 4: Calculate the change in carrying value of the debt due to the first interest payment. Be sure to indicate if the carrying value increased or decreased.
Question 5: Did this bond sell for a premium or discount? Describe why an investor would have paid a premium (or discount) for the bond. Be sure to include in your description the impact of the comparative size of the stated and effective rates of interest.
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