On January 1 of Year 1, Congo Express Airways issued $4,000,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,550,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $12,500 every 6 months. The life of these bonds is:
Multiple Choice
36 years.
12 years.
32 years.
28 years
18 years.
Correct answer----18 years
A bond is fully amortized in its life and if we know the amount of amortization we can easily know the period of bond
Bond Par value (A) |
$ 40,00,000.00 |
Bond issue price (B) |
$ 35,50,000.00 |
Bond Discount (A-B) |
$ 4,50,000.00 |
Bond discount amortised per 6 month |
$ 12,500.00 |
Duration of Bond ((450000/12500)/2) |
18 years |
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