On January 2,20x5,Barham Corporation Issued Ten-Year Bonds Payable with a Face

question 188

Multiple Choice

On January 2,20x5,Barham Corporation issued ten-year bonds payable with a face value of $400,000 and a face interest rate of 9 percent.The bonds were issued to yield a market interest rate of 10 percent.Interest is payable semiannually on January 2 and July 1.In calculating the present value of the bond issue on January 2,20x5,

• A)the 9 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
• B)a 5 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
• C)the 10 percent rate will be used to calculate the present value of the face amount and the present value of the periodic interest payments.
• D)the 10 percent rate will be used to calculate the present value of the face amount and a 5 percent rate will be used to calculate the present value of the periodic interest payments.

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Definitions:

Return

The profit or deficit experienced on an investment during a given period, represented as a percentage of the original investment's value.

Security Market Line

A line that represents the relationship between the risk of an investment and its expected return, used in the capital asset pricing model.

Market Risk Premium

The additional return expected by investors for taking on the higher risk of investing in the stock market over a risk-free rate.

Beta

A measure of a stock's volatility in comparison to the overall market; a beta above 1 indicates greater volatility than the market.