Question

Ten Year, 6% Bonds with a $4,000,000 par value , were issued at a time when...

Ten Year, 6% Bonds with a $4,000,000 par value , were issued at a time when the market rate of interest was 8%. The

Discount /Premium on these Bonds is amortized semi

-annually each interest period. Given these facts, which of

the following

statements would be true?

a.

The amount of unamortized premium decreases from its balance at issuance date and the carrying

value of the Bond increases.

b.

The amount of unamortized discount decreases from its balance at issuance date and the carrying

value of the Bond increases.

c.

The amount of unamortized premium increases from its balance at issuance date and the carrying

value of the Bond decreases.

d.

The amount of unamortized discount increases from its balance at issuance date and the carrying

value of the Bond decreases

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Homework Answers

Answer #1
Par Value $4,000,000
Market Interest Rate 8%
Coupon Rate 6%
Since the market interest rate on the bond is higher than the coupon payment, the bond will be issued at the discount rate
Therefore the bond is amortized every year for the discount
In that case the unamortized balance reduces and the value of bond at issuance date increases
Therefore, option B is the correct option
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