Explore BrainMass

Bond question

A corporation issues for cash $1,000,000 of 8%, 20 year bonds, interest payable annually at a time when the market rate of interest is 7%. The straight- line method is adopted for the amortization of bond discount or premium. Which of hte following statements is true
a. the carrying amount increases from its amount at issueance date to $1,000.000 at maturity.
b. the carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.
c. the amount of annual interest paid to bondholders increases over the 20-year life of the bonds
d. the amount of annual interst expense decreases as the bonds approach maturity.

What makes sense to me is number C
becasue over 20 years of life of the bonds will indeed increase.

Solution Preview

If the market rate of interest is 7% and the stated rate on the bond is 8%, this would imply that the bonds are issued at a premium. If the bonds are issued at a premium, the carrying value when the ...

Solution Summary

The solution explains a multiple choice question relating to bond