Question

Dylan Corporation issues for cash $2,000,000 of 8%, 15-year bonds, interest payable annually, at a time when the market rate of interest is 9%. The straight-line method is adopted for the amortization of bond discount or premium. Which of the following statements is true?

a. The amount of annual interest paid to bondholders increases over the 15-year life of the bonds.

b. The carrying amount decreases from its amount at issuance date to $2,000,000 at maturity.

c. The amount of annual interest expense decreases as the bonds approach maturity.

d. The amount of annual interest paid to bondholders remains the same over the life of the bonds.

Answer 1

Answer:

D) The amount of annual interest paid to bondholders remains the same over the life of the bonds.

Explanation:

Since Dylan's coupon rate was lower than the market rate, then they will have to sell their bonds at a discount, i.e. at a lower price than face value. The price of the bond will be lower than the face value, but the actual coupon paid will remain the same during the 15 years.