It Is Often Necessary to Compute the Book Value of a Bond

question 24

Essay

It is often necessary to compute the book value of a bond issue several years into its term.Rather than compute an amortization schedule for the entire term, it is possible to directly compute the net bond liability at any interest date under either the interest method or straight-line method.Assume that $100,000 of 8% bonds were issued to yield 10% on January 1, 2010, the bond date.The bonds pay interest each December 31 and are scheduled to mature in ten years.Answer the following questions without producing an amortization schedule.
(a)What is the book value of the bonds on January 1, 2016 if the firm uses the straight-line method.
(b)What is the book value of the bonds on January 1, 2016 if the firm uses the interest (effective interest)method.

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Definitions:

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