Question

On January 1 of Year 1 , Congo Express Airways issued $4,200,000 of 7%, bonds that pay interest semiannually on January 1 and July 1 . The bond issue price is $3,660,000 and the market rate of interest for similar bonds is 9%. The bond premium or discount is being amortized using the straight-line method at a rate of $13,500 every six months. The life of these bonds is: Multiple Choice 20 years. 15 years. 40 years. 31 years. 27 years

Answer 1

The life of the Congo Express Airways bonds is 20 years. This is calculated by dividing the total bond discount of $540,000 by the semiannual amortization amount of $13,500, resulting in 40 periods. Since interest is paid semiannually, this equates to 20 years.

Step-by-step explanation:

To determine the life of the bonds issued by Congo Express Airways, we will calculate the total amount of discount or premium being amortized and then determine the number of periods over which it is being amortized. Since the bonds were issued for $3,660,000 and the face value of the bonds is $4,200,000, this means there is a discount on the bonds of $4,200,000 - $3,660,000 = $540,000. The discount is being amortized at a rate of $13,500 every six months.

1. Calculate the total number of amortization periods by dividing the total discount by the semiannual amortization amount: $540,000 ÷ $13,500 = 40 periods.
2. Since interest is paid semiannually, 40 periods represent 20 years (40 ÷ 2 = 20 years).

Therefore, the life of these bonds is 20 years.