Showing posts with label premium. Show all posts
Showing posts with label premium. Show all posts

Monday, January 18, 2021

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually

Discount-Mart issues $10 million in bonds on January 1, 2021. The bonds have a ten-year term and pay interest semiannually on June 30 and December 31 each year. Below is a partial bond amortization schedule for the bonds:


Date Cash Paid Interest Expense Increase in Carrying Value Carrying Value

01/01/2021 $ 8,640,967

06/30/2021 $ 300,000 $ 345,639 $ 45,639 8,686,606

12/31/2021 300,000 347,464 47,464 8,734,070

06/30/2022 300,000 349,363 49,363 8,783,433

12/31/2022 300,000 351,337 51,337 8,834,770


What is the market annual rate of interest on the bonds? (Hint: Be sure to provide the annual rate rather than the six-month rate.)



A) 3%.

B) 4%.

C) 6%.

D) 8%.


Answer: D


When bonds are issued at a premium and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:



A) Less than the interest expense.

B) Equal to the interest expense.

C) Greater than the interest expense.

D) More than if the bonds had been sold at a discount.


Answer: C


When bonds are issued at a discount and the effective interest method is used for amortization, at each interest payment date, the interest expense:



A) Increases.

B) Decreases.

C) Remains the same.

D) Is equal to the change in book value.


Answer: A

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:

When bonds are issued at a premium and the effective interest method is used for amortization, at each interest payment date, the interest expense:



A) Increases.

B) Decreases.

C) Remains the same.

D) Is equal to the change in book value.


Answer: B


How would the carrying value of bonds payable change over time for bonds issued at a discount and for bonds issued at a premium?



A) Decrease for bonds issued at a discount and decrease for bonds issued at a premium.

B) Decrease for bonds issued at a discount and increase for bonds issued at a premium.

C) Increase for bonds issued at a discount and decrease for bonds issued at a premium.

D) Increase for bonds issued at a discount and increase for bonds issued at a premium.


Answer: C


An amortization schedule for a bond issued at a discount:



A) Has a carrying value that decreases over time.

B) Is contained in the balance sheet.

C) Is a schedule that reflects the changes in carrying value of the bond over its term to maturity.

D) All of the other answer choices are correct.


Answer: C

Given the information below, which bond(s) will be issued at a discount?

Given the information below, which bond(s) will be issued at a discount?


Bond 1 Bond 2 Bond 3 Bond 4

Stated Rate of Return 5 % 7 % 12 % 10 %

Market Rate of Return 7 % 8 % 12 % 9 %



A) Bond 1.

B) Bond 2.

C) Bond 4.

D) Bonds 1 and 2.




Answer: D


Given the information below, which bond(s) will be issued at a premium?


Bond 1 Bond 2 Bond 3 Bond 4

Stated Rate of Return 5 % 10 % 7 % 10 %

Market Rate of Return 7 % 8 % 7 % 9 %



A) Bond 1.

B) Bond 2.

C) Bond 3.

D) Bonds 2 and 4.



Answer: D


Given the information below, which bond(s) will be issued at a discount?


Bond 1 Bond 2 Bond 3 Bond 4

Stated Rate of Return 10 % 8 % 12 % 12 %

Market Rate of Return 12 % 8 % 15 % 10 %



A) Bond 1.

B) Bond 3.

C) Bonds 2 and 4.

D) Bonds 1 and 3.



Answer: D

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000

Bond X and Bond Y are both issued by the same company. Each of the bonds has a face value of $100,000 and each matures in 10 years. Bond X pays 8% interest while Bond Y pays 7% interest. The current market rate of interest is 7%. Which of the following is correct?



A) Both bonds will sell for the same amount.

B) Bond X will sell for more than Bond Y.

C) Bond Y will sell for more than Bond X.

D) Both bonds will sell at a premium.


Answer: B


Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond (rounded to nearest whole dollar?


A) $83,920.

B) $46,320.

C) $53,605.

D) $50,000.


Answer: B


Given the information below, which bond(s) will be issued at a premium?


Bond 1 Bond 2 Bond 3 Bond 4

Stated Rate of Return 7 % 12 % 10 % 8 %

Market Rate of Return 8 % 10 % 10 % 9 %



A) Bond 1.

B) Bond 2.

C) Bond 3.

D) Bonds 2 and 4.



Answer: B

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