Question 1 Part A and B

A. On January 1, 2018, an investor paid $307,000 for bonds with a face amount of $345,000. The stated rate of interest is 11% while the current market rate of interest is 13%. Using the effective interest method, how much interest income is recognized by the investor in 2018 (assume annual interest payments and amortization)?

Multiple Choice

• $37,950.

• $39,910.

• $33,770.

• $44,850.

B. A bond issue with a face amount of $1,200,000 bears interest at the rate of 6%. The current market rate of interest is 7%. These bonds will sell at a price that is:

Multiple Choice

• More than $1,200,000.

• Less than $1,200,000.

• The answer cannot be determined from the information provided.

• Equal to $1,200,000.