Question

Which of the following would result in the amortization of a bond discount or premium?

1) Bonds are issued: No; Bonds are held as investments: No
2) Bonds are issued: No; Bonds are held as investments: Yes
3) Bonds are issued: Yes; Bonds are held as investments: No
4) Bonds are issued: Yes; Bonds are held as investments: Yes

Answer 1

Amortization of a bond discount or premium occurs when the market interest rate differs from the coupon rate of the bond. Option 3 - Bonds are issued: Yes; Bonds are held as investments: No would result in the amortization of a bond discount or premium.

Step-by-step explanation:

Amortization of a bond discount or premium occurs when the market interest rate differs from the coupon rate of the bond. If the bond is issued at a discount (below its face value) because the coupon rate is lower than the market rate, the discount is amortized over the life of the bond. If the bond is issued at a premium (above its face value) because the coupon rate is higher than the market rate, the premium is also amortized over the life of the bond.

In this case, the option that would result in the amortization of a bond discount or premium is: 3) Bonds are issued: Yes; Bonds are held as investments: No.