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What and When are the time constraints for bonds?

A corporation issues for cash $2,000,000 of 8%, 15-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 the following statements is true? a. The carrying amount increases from its amount at issuance date to $2,000,000 at maturity. b. The amount of annual interest paid to bondholders increases over the 15-year life of the bonds. c. The amount of annual interest expense decreases as the bonds approach maturity. d. The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity. Read more: Ask a Question | Answerbag http://www.answerbag.com/new_question_save/#ixzz15anFlq4M

  • Answer:

    Answer: D

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I'm not entirely clear on the terminology. The bond sells at a premium because it is offering a higher rate of interest than is typical of the market at that time (8% vs 7%). So the person buying the bond has to pay more than 2 million (say, 2.3 million) when it is issued, and at maturity they get back 2 million. If that is what they mean by "carrying amount" then the answer would be D, that amount decreases from 2.3 million to 2 million.

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