Several years ago, Durham City issued $1 million in zero coupon bonds due and pa

Question

Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds?

A) Book value of bonds times 6%

B) Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period

C) Face amounts of bonds times 6%

D) The present value of the bonds at the beginning of the period minus the present value of the bonds at the end of the period multiplied by 6%

Explanation / Answer

Interest is computed on face value of the bonds. Interest to be paid each period is determined by coupon rate (stated interest rate) for that period.Present value calculation is based on market interest rate. Therefore interest will be paid on Face Amount of bond times 6%.

Option C is correct.

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