A firm issues a 4-year semiannual-pay bond with a face value of $10 million and a coupon rate of 10%. The market interest rate is 11% when the bond is issued. The interest expense for the first semiannual period and the balance sheet liability at the end of the first semiannual period are closest to:Interest expenseBalance sheet liability （）①A. $ 532580 $ 9683272 ②B. $ 532580 $ 9715852 ③C. $ 550000 $ 9683272
A. ①
B. ②
C. ③
参考答案：B
解析：
The initial liability is the amount received from the creditor, not the par value of the bond. N=8; I/Y=11/2=5.5; PMT=500000; FV=10000000; CPT→PV=$ 9683272. The interest expense is the effective interest rate (the market rate at the time of issue) times the balance sheet liability. $ 9683272×0.055=$ 532580. The value of the liability will change over time and is a function of the initial liability, the interest expense and the actual cash payments. In this case, it increases by the difference between the interest expense and the actual cash payment: $ 532580+$ 500000=$ 32580+$ 9683272=$ 9715852. Tip: Knowing that the liability will increase is enough to select choice B without performing this last calculation. Entering N=7 and solving for PV also produces $9715852.