Hello, I would like the remaining answers for these questions below (to study fo

Question

Hello, I would like the remaining answers for these questions below (to study for a quiz):

T or F. Explain please.

6. bond discount is a liability valuation account

7. Annual amortization of bond discount results in an increase in interest expense and the bond's carrying value.

8. When bonds were initially sold at a discount, interest expense increases as the bonds reach maturity.

9. As a bond matures, annual amortization of bond premium increases while annual interest expense decreases.

10. Annual amortization of bond discount increases as a bond matures.

11. The annual amortization of bond discount and bond premium increases as the bond matures.

Explanation / Answer

6. Bond discount is a liability valuation account, as it reduces the face value of the liability and is presented net in balance sheet

For illustration take a case where bond with a face value of 1000, coupon rate of 10%, interest paid annually will be issued at, with a required return of 12%:

and bond amortisation schedule as follows:

7. True, due to amortisation carrying value of liability increased as shown above as well the interest expense

8. True, as shown above interest expense increasing year on year

9. True, below is the illustration

take a case where required return of 9%, coupon rate of 10% bond issued at premium

bond price will be:

10. True, as per the illustration

11. True, as per the illustrations

Year 1 Year 2 Year 3 Interest 100 100 100 Principal 1000 Total payment 100 100 1100 Discount factor@12% 0.892857143 0.797194 0.71178 Discounted cash flow 89.29 79.72 782.96 Issue price 951.96

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