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pychu [463]
3 years ago
15

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash p

aid is:
A. Less than the effective interest.
B. Equal to the effective interest.
C.Greater than the effective interest.
D. More than if the bonds had been sold at a discount.
Business
1 answer:
lorasvet [3.4K]3 years ago
4 0

Answer:

C.Greater than the effective interest.

Explanation:

<u>example</u>

face value 1,000,000

issued at 1,100,000

premium of 100,000

the bond rate is 8%

and the effective rate is 6%

1,100,000 x 6%/2 = 33,000 interest expense

cash proceeds 1,000,000 x 8%/2 = 40,000 cash

amortization on premium 40,000 - 33,000 = 7,000

The cash payment (40,000) are greater than the effective interest (33,000)

If that wouldn't be the case, he premium won't depreciate

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Answer:

Therefore the required time period is 3 years.

Explanation:

To calculate the number of period we are using the following formula of future value

Future value = C_0(1+r)^n

C_0 is cash flow at period 0= $ 35,00

r = rate of interest = 8.00% = 0.08

n= number of periods = ?

Future value = $44,089.92

Substituting the values in the formula

44,089.92= 35,000(1+0.08)^n

\Rightarrow (1+0.08)^n=\frac{44089.92}{35000}

\Rightarrow(1.08)^n = 1.259712

\Rightarrow (1.08)^n=(1.08)^3

\therefore n= 3

Therefore the required time period is 3 years.

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Answer:

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