A corporation issues $100,000, 10%, 5-year bonds on January 1, 20X4 for $108,111, at a price to yield 8%. Interest is paid semi-annually on January 1 and July 1. The amount of premium amortized on July 1, 20X4 is
A) $8,649
B) $5,000
C) $676
D) $4,324

Question

Quizplus · Accepted Answer

The premium amortized is the difference between the interest expense and the cash interest paid. The interest expense is calculated using the effective interest rate method: $108,111 * 4% (semi-annual yield) = $4,324.44. The cash interest paid is $100,000 * 5% (semi-annual coupon rate) = $5,000. The premium amortized is $5,000 - $4,324.44 = $675.56, which rounds to $676.

A Corporation Issues $100,000, 10%, 5-Year Bonds on January 1