Question

On January 1 of Year 1, Congo Express Airways issued $3,500,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,197,389 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 $10,087 every six months. The life of these bonds is:

a.30 years.
b.32 years.
c.26.5 years.
d.35 years.
e.15 years.

Answer 1

The correct answer is E.) The life of the Congo Express Airways bonds is 15 years, calculated by dividing the total bond discount by the semiannual amortization rate and then converting the number of periods into years.

Step-by-step explanation:

To determine the life of the Congo Express Airways bonds, we can use the information provided about the amortization of the bond discount. The total discount on the bonds is the difference between the face value and the issue price, which is $3,500,000 - $3,197,389 = $302,611. Since the discount is being amortized at a rate of $10,087 every six months, we can calculate the total number of periods by dividing the total discount by the amortization amount per period.

$302,611 ÷ $10,087 = 30 periods

Given that the interest is paid semiannually, each period represents six months. Therefore, the life of the bond in years is the number of periods times 0.5 (since there are two periods per year).

30 periods × 0.5 years/period = 15 years. So, the correct answer is e. 15 years.

Answer 2

The life of the Congo Express Airways bonds is calculated by dividing the total bond discount by the semiannual amortization amount, then converting the resulting number of periods into years, yielding 60 years. However, this is not reflected in the provided answer choices, suggesting a possible error in the question or answer choices.

Step-by-step explanation:

To determine the life of the Congo Express Airways bonds, we must calculate the total amount of discount being amortized and divide it by the amount amortized every six months. The issue price of $3,197,389 is less than the face value of the bonds which is $3,500,000, creating a bond discount of $3,500,000 - $3,197,389 = $302,611. The bond discount is being amortized at a rate of $10,087 every six months. To find out how many six-month periods it will take to amortize the full discount, we divide the total discount by the semiannual amortization amount, which is $302,611 / $10,087 ≈ 30 periods. Since interest is paid semiannually,

we multiply these 30 periods by 2 to convert to years, obtaining the life of the bond: 30 x 2 = 60 years. However, none of the given answer choices matches this duration. Thus, there might be an error in the question or in the provided answer choices.