Question

A bond with a maturity value of $700,000 was initially issued for $715,000. The bond has a ten-year life and a stated interest rate of 10%. The total interest expense over the life of the bond is:A) $700,000.B) $685,000.
C) not determinable without knowing the bond's effective yield.D) $715,000.

Answer 1

Answer:

The correct answer is option B.

Explanation:

The maturity value of the bond is $700,000.

The bond is issued for $715,000.

The life of the bond is 10 years.

The interest rate is 10%.

The total life expense will be

= $\ 700,000\ -\ (\ 715,000\ -\ \ 700,000)\ \times \ 10\%\ \times\ 10$

= $\ 700,000\ -\ \ 15,000\ \times\ 0.10\ \times\ 10$

= $700,000 - $15,000

= $685,000