Question:

I am a little confused with these few questions. I got all of the others, I just cant figure out these 3?

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1. The interest rate specified in the bond indenture is called the

discount rate

contract rate

market rate

effective rate

2. A corporation issues for cash $1,000,000 of 8%, 20-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?

The carrying amount increases from its amount at issuance date to $1,000,000 at maturity.

The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.

The amount of annual interest paid to bondholders increases over the 20-year life of the bonds.

The amount of annual interest expense decreases as the bonds approach maturity.

3. If bonds are issued at a discount, it means that the

bondholder will receive effectively less interest than the contractual rate of interest

market interest rate is lower than the contractual interest rate

market interest rate is higher than the contractual interest rate

financial strength of the issuer is suspect

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1 ANSWERS


  1. 1. The interest rate specified in the bond indenture is called the

    contract rate

    2. A corporation issues for cash $1,000,000 of 8%, 20-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?

    The carrying amount decreases from its amount at issuance date to $1,000,000 at maturity.

    3. If bonds are issued at a discount, it means that the

    market interest rate is higher than the contractual interest rate

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