Question

On January 1 of Year 1, Congo Express Airways issued $3,800,000 of 7%, bonds that pay...

On January 1 of Year 1, Congo Express Airways issued $3,800,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,432,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $11,500 every 6 months. The life of these bonds is:

Multiple Choice

30 years

16 years.

32 years.

11 years.

33 years.

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Homework Answers

Answer #1

Solution:

Total Discount on Bond issued = Face Value of Bond - Issue Price of Bond = $3,800,000 - $3,432,000 = $368,000

Now,

Discount amortization every 6 months = Total Discount on bond / Total Number of Half years during life of bond

$11500 = $368000 / Total Number of Half years during life of bond

Total Number of Half years during Life of Bond = $368000/$11500

Total Number of Half years during Life of Bond = 32 half years

Therefore Life of bonds = 32 half years/ 2 = 16 years

Hence second option "16 years" is correct.

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