(a) Determine what is the payment stream of the bond. (b) Determine the effective duration of the bond's payments if interest is compounded annually at rate 3%. State your answer to three significant figures. (c) Find the duration of the bond's payments if interest is compounded continuously at rate 3%. State your answer to three significant figures.

(a) Determine what is the payment stream of the bond. (b) Determine the effective duration of the bond's payments if interest is compounded annually at rate 3%. State your answer to three significant figures. (c) Find the duration of the bond's payments if interest is compounded continuously at rate 3%. State your answer to three significant figures.

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter10: Long-term Liabilities

Section: Chapter Questions

Problem 10.1E

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Select the correct answer to each of the following statements. A. Increase B. Decrease C. Remain Constant 1. The amount of interest expense will _______ each payment period for a bond issued at a discount. 2. When a bond is issued at a discount, the cash interest payment will _________ over the life of the bond. 3. When a bond is issued at a premium, the carrying value of the bond will _______ over the life of the bond.
There are certain patterns we should expect to see on a bond amortization table. Complete the following statements regarding these patterns. Item Statements A. Assuming a term bond is issued at a premium, the cash interest payment calculated every period should: B. Assuming a term bond is issued at a premium, the interest expense amount calculated every period using the effective interest method should be C. Assuming a term bond is issued at a premium, the carrying value over time should be D. Assuming a term bond is issued at either a premium or a discount, the carrying value on the issuance date should be equal to the bond's
. Which of the following are true for a bond maturing on a single date when the effective interest method of amortizing bond discount is used?a. interest expense as a percentage of the bond’s carrying amount varies from period to periodb. interest expense increases each six-month period c. interest expense remains constant each six-month periodd. effective interest rate is used to compute for the periodic interest a and b c and d a and d b and c
When the effective-interest method is used, the amount of bond discount amortized eachinterest period is equal to thea. amount of interest expense less the cash paid for interest.b. amount of interest expense plus the cash paid for interest.c. face value of the bond times the market interest rate at the date of issue.d. face value of the bond times the stated interest rate.
Explain how each of the columns in an amortization schedule is calculated, assuming the bonds are issued at a discount. How is the amortization schedule different if bonds are issued at a premium?
If bonds are redeemed on maturity date, any premium or discount a. Is carried forward and written off in the same manner as that used prior to the maturity date. b. Should be used to calculate the gain or loss resulting from the maturity of the bonds. c. Should be written off directly to a bond retirement account as the bond will be redeemed. d. Will be fully amortized as its amortization period is designed to coincide with the life of the bond issue.
When bonds are issued at a premium and the effective interest method is used for amortization, at each successive interest payment date, the interest expense: Select one: a. Is equal to the change in market value of the bonds b. Decreases c. Stays the same d. Increases e. Is equal to the change in carrying value of the bonds
Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to Select one: a. the market rate multiplied by the beginning-of-period carrying amount of the bonds b. the stated (nominal) rate of interest multiplied by the face value of the bonds. c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds. 17
(34) Under the effective - interest method of amortization, the bond cash payment on each interest date is calculated by multiplying the: A. Carrying value of the bonds times the effective - interest rate for the appropriate time period. B. Face value of the bonds times the stated interest rate for the appropriate time period. C. Face value of the bonds times the effective - interest rate for the appropriate time period. D. Carrying value of the bonds times the stated interest rate for the appropriate time period.
Distinguish between the following interest rates for bonds payable:(a) Yield rate. (d) Market rate.(b) Nominal rate. (e) Effective rate.(c) Stated rate.
When determining the amount of interest to be paid on a bond, which of the following information is not necessary? a. The length of the interest period, annually or semiannually b. The face rate of interest on the bonds c. The face amount of the bonds d. The selling price of the bonds
23. The bond issue price is determined by calculating the a.future value of the stream of interest payments and the future value of the maturity amount. b.present value of the stream of interest payments and the present value of the maturity amount. c.future value of the stream of interest payments and the present value of the maturity amount. d.present value of the stream of interest payments and the future value of the maturity amount.