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Q11Q

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Intermediate Accounting (Kieso)
Found in: Page 753

Short Answer

Question: What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

Answer

A call feature is a characteristic in the contract of bond that permits the issuer to repay bonds at a stated price within specified future time interval. The call feature has no effect on the amortization of bond premium or discount.

See the step by step solution

Step by Step Solution

Step 1: Meaning of bond issue

Bond issue is a method adopted by the firms for raising money. Herein, the investor agrees to give the corporation a specified amount of money for a particular time period. In return, the investor obtains regular payment of interest.

Step 2: “Call” feature of a bond issue

The call feature of a bond issue permits the issuer the advantage of buying, after a specified date at a aforesaid price, outstanding bonds with the motive of diminishing indebtedness or taking benefit of lesser rates of interest.

Step 3: The way by which the call feature affects the amortization of bond premium or discount

The call feature remains unaffected by the amortization of bond discount or premium as untimely redemption is uncertain, the term of bonds is to be used for the cause of amortization.

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