1. Kiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds?
A. Less than $500,000 because the 7% yield rate of interest was higher than the stated rate.
B. Exactly $500,000 because the company would still pay interest at the stated rate.
C. More than $500,000 because the 6% stated rate of interest was less than the yield rate.
D. The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%
2. A company issued 10-year, 9%, $1,000,000 bonds paying interest on an annual basis, at a premium. Which one of the following statements is true?
A. The annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year.
B. The annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year.
C. The cash paid to bondholders will be based on the market rate of interest.
D. The issue price will be less than $1,000,000.
3. On January 2, 2013, this company issued 1,000,000, 10-year bonds for $1,150,000. The bonds pay interest on June 30 and December 31. The stated rate is 10% and the market rate is 8%. The company plans to use the effective interest method of amortizing bond discounts and premiums.
Refer to Kalahari Limited. The interest expense on the bonds at June 30, 2013 is:
A. $40,000
B. $42,400
C. $46,000
D. $50,000