On January 1, Your Company Issues a 5-Year Bond with a Face

question 133

Multiple Choice

On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%. The market interest rate is 5%. The issue price of the bond was $10,866. Using the effective-interest
Method of amortization and rounding to the nearest dollar, the interest expense for the first year ended
December 31 would be:

• A) $700.
• B) $543
• C) $667.
• D) $759

---

Definitions:

Market Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of holding a market portfolio.

Required Return

The minimum rate of return on an investment that investors expect or require to compensate for risks taken.

Beta

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds (ETFs).