Asked by Jaqueline Martinez on Jun 22, 2024
Verified
If the amount of a bond premium on an issued 11%, 4-year, $100,000 bond is $12,928, the annual interest expense is $5,500.
Bond Premium
The amount by which the market price of a bond exceeds its face value.
Annual Interest Expense
The total amount of interest a company expects to pay on its debts over a year.
$100,000 Bond
A debt instrument issued by a corporation or government entity, with a principal amount of $100,000, to raise funds from investors.
- Understand how amortization of bond premium or discount affects interest expense.
Verified Answer
MM
mayeline martinezJun 28, 2024
Final Answer :
False
Explanation :
The annual interest expense on a bond issued at a premium is calculated as the bond's coupon payment minus the amortization of the premium. The coupon payment for an 11% bond with a face value of $100,000 is $11,000 annually. The premium amortization would be the total premium ($12,928) divided by the bond term (4 years), which equals $3,232 annually. Therefore, the annual interest expense is $11,000 - $3,232 = $7,768, not $5,500.
Learning Objectives
- Understand how amortization of bond premium or discount affects interest expense.
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