Question

on january 1 of year 1, congo express airways issued $4,300,000 of 7%, bonds that pay interest semiannually on january 1 and july 1. the bond issue price is $3,936,000 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 $14,000 every six months. the life of these bonds is:

Answer 1

Congo Express Airways' bond, which pays a 7% interest rate and is being amortized by $14,000 semi annually, has a 13 years lifespan meaning that it would be entirely paid off after that time.

Step-by-step explanation:

The question is asking about the lifespan of a bond issued by Congo Express Airways, which carries a 7% interest rate, pays interest semiannually, and is being amortized using the straight-line method at a rate of $14,000 every six months. The difference between the bond issue price and the face value is $4,300,000 - $3,936,000 = $364,000. As we know that the straight-line method of bond amortization spreads the premium or discount evenly over the life of the bond, and that this amount is being amortized at a rate of $14,000 semiannually, we can estimate the lifespan of the bond. Therefore, the life of the bond would be $364,000 divided by $14,000, which equals 26 periods, since the bond is paid semiannually this would be 13 years.

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