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

Assume coupons are paid annually. Here are the prices of three bonds with 10-year maturities:
Bond Coupon (%) Price (%)
2 81.62
4 98.39
8 133.42
________________________________________
a. What is the yield to maturity fo

Is it true that the following question can be used to find the value of a bond with N years to maturity that pays interest once a year? Assume that the bond was issued several years ago.

A $1,000 par value bond pays $50 in interest every six months. What will be the value of the bond if it matures in 30 months and the yield-to-maturity of similar risk bonds is 8%?

A bond has the following terms:
Annual interest $100
Term 15 years
Principal $1,000
a. What is the current price of the bond if comparable yields are 7 percent?
b. What are the current yield and yield to maturity given the price of the bond in the previous question?
c. If you expect the b

1. Find the value of a bond with the following characteristics: (a) face value of $1,000, (b) 8% coupon rate, (c) the bond matures in 14 years, (d) the market rate of interest is 6%.
2. Is the bond priced in question 1 selling at a discount or premium to its par value?
3. Using the information from question 1: the market r

Question: A treasury bond that matures in ten years has a yield of 6 percent. A 10 year corporate bond has a yield of 8 percent. Assume that the liquidity premium on the corporate bond is .5 percent. What is the default risk premium on the corporate bond?

You are considering purchasing a bond at the end of this year. The bond has a coupon rate of 10.5 percent, interest payments are made annually and the bond matures in 20 years. If your required pretax rate of return is 14 percent, what is the maximum price you would be willing to pay for a 20-year, 10.5 percent bond? Assume t

Choosing between bonds
4. An investor must choose between two bonds:
Bond A pays $92 annual interest and has a market value of $875. It has 10 years maturity. Bond B pays $82 annual interest and has a market value of $900. It has two years to maturity.
a. Compute the current yield on both bonds?
b. Which bond should be

Two years ago, you acquired a 10-year zero coupon, $1000 par value bond at a 12 percent YTM. Recently you sold this bond at an 8 percent YTM. Using semiannual compounding, compute the annualized horizon return for this investment.