honeycfa

When bonds are issued at a premium:

A) earnings of the firm increase over the life of the bond as the bond premium is amortized.

B) coupon interest paid decreases each period as bond premium is amortized.

C) earnings of the firm decrease over the life of the bond as the bond premium is amortized.

---

As bond premium is amortized, interest expense will be successively lower each period, thus increasing earnings over the life of the bond.

honeycfa

Assume a city issues a $5 million bond to build a hockey rink. The bond pays 8% semiannual interest and will mature in 10 years. Current interest rates are 6%. What is the present value of this bond?

A) $5,000,000.

B) $5,743,874.

C) $3,363,478.

---

Since current interest rates are lower than the coupon rate the bond will be issued at a premium. FV = $5,000,000 N = 20 I/Y = 3 PMT = (0.04)($5,000,000) = $200,000. Compute PV = $-5,743,874

honeycfa

Which of the following statements about debt is least accurate?

A) When a bond’s coupon rate is greater than the market rate of return at issuance, the bond’s balance sheet value will be greater than the face value.

B) Convertible debt must be treated as equity when computing the firm's debt to equity ratio.

C) If a firm issues bonds with detachable warrants, the proceeds must be allocated between the two components on the firm's balance sheet.

---

Treating convertible debt as equity is not required but suggested for financial analysis.

honeycfa

Which of the following statements for a bond issued with a coupon rate above the market rate of interest is FALSE?

A) The value of the bond will be amortized toward zero over the life of the bond.

B) The bond will be shown on the balance sheet at the premium value.

C) The associated interest expense will be lower than that implied by the coupon rate.

---

The value of the bond’s premium will be amortized toward zero over the life of the bond, not the value of the bond.