Question

A corporation issues for cash $15,000,000 of 9%, 30 year bonds, interest payable annually, at a time when the market rate of interest is 8%. The straight line method is adopted for the amortization of bond discount or premium. Which is true? A. the amount of interest paid to bondholders decreases over the life of the bonds B. the amount of annual interest paid to bondholders is $1,200,000 annually C. the amount of annual interest paid to bondholders increases over the life of the bond D. the carrying amount decreases from its amount at issuance date to $15,000,000 at maturity.

Answer 1

Interest is calculated on the face value of the bond, hence interest neither increases nor decreases over the life of the bond. Hence, a and c ate incorrect.

Annual Interest on Bonds = 9%*15,000,000 = $1,350,000

Hence, b is incorrect.

Straight line method is adopted for the amortization of bond discount or premium. Hence, premium cost will be written off over the life of the bond and t he carrying amount decreases from its amount at issuance date to $15,000,000 at maturity.

Hence, D is correct