June 15 question 3)

We need the retained earnings each year because they form part of the book value of equity. The loan is repaid in equal instalments which include principal and interest. Dividing by the annuity factor gives the amount to be repaid each year. Then we can calculate how much the interest is, which we need to get the retained earnings. Equity increases because of the retained earnings. Debt reduces being we are repaying part of the principal each year.

23,342 for the 8% bond, plus 20,000 for the 6% convertible bond.

Whenever you borrow money, interest is added each year on the opening balance. By dividing by the annuity factor we can find out what equal amount needs paying each year so that by the end of the loan all the principal and interest has been paid (and the answer 'proves' how this works).