Question

Indicate which of the bond types listed in the answer options (1 -5) describe the following features: 1. The periodic interest expense incurred for this particular bond is decreasing over the life of the bond. 2. The carrying value of this bond remains constant over the life of the bond, and equal to the face value of the bond. 3. The stated interest rate for this particular bond is assumed to be equal to the effective interest rate. 4. The periodic interest expense incurred for this particular bond is different from the periodic cash payment. 5. The carrying value of this bond increases each period over the life of the bond. This feature may apply to more than just one type. You are required to select all bond types where the particular feature is applicable. a. Installment bond b. Bond issued at a discount. c. Zero-Coupon bond. d. Bond issued at a premium. e. None of the previously listed bonds have this particular feature. I think the correct options are 1. d. Bond issued at a premium. 2. e. None of the previously listed bonds have this particular feature. 3. c. Zero-Coupon bond. 4. a. Installment bond, b. Bond issued at a discount., c. Zero-Coupon bond., d. Bond issued at a premium. 5. b. Bond issued at a discount.

Answer 1

1) a- Instalment bonds - as the principal amount payment is done periodically the interest from the next year will be reduced

2) e- none of the above listed bonds.

If the carrying amount is constant then it must be redeemed at maturity and interest is paid periodically . Such kind of bonds are not listed above

3) C- zero coupon bonds

These bonds are issued at discount and redeemed at par , the interest is payable on the face value. So the stated interest is equal to the effective interest rate.

4) a- Instalment bonds

The amount is paid in instalments. So the carrying value of bonds get redued . So the periodic interst expense is different from periodic cash payment.

5) b- bonds issued at discount

Since the bond were originally issued at discount, the time value of money considered and carrying value of bonds will be increased according to the remaining life of the bonds. So carrying value of these bonds increase over the life of bonds