Finance - Bond Question

Question

The amortization of a bond premium:

A) Decreases the carrying value of a bond and increases interest expense.

B) Decreases the carrying value of a bond and decreases interest expense.

C) Increases the carrying value of a bond and increases interest expense.

D) Increases the carrying value of a bond and decreases interest expense.

Answer 1

this questions is poorly asked b/c we need more info on teh type of bond.  

amortization generally decreases the carrying value of the bond, and also tends to show decreasing interest expense as time goes on, because your amortization table has teh following columns:

Beg Carrying Val. ,  Cash Payment,  Interest Expense, Reduction to CV, Ending CV.

so in general, the cash payment is fixed, and initially, the cash payment is comprised mostly of interest expense.  as teh carrying value of the bond decreases, so too does the associated interest expense.

so B is probably your answer.  HOWEVER,there are all kinds of bonds out there with different payment patterns, etc etc, so this question is too general and vague, and doesn't give you enough background info.  you can tell your teacher i said this. lol...

Answer 2

A. Decreases the carrying value of the bond and increases the interest expense.