For bonds issued at a premium, the difference between interest expense and the c

Question

For bonds issued at a premium, the difference between interest expense and the cash paid increases the carrying value of the bonds.



a. TRUE

b. FALSE


We can calculate the issue price of a bond as the face amount plus the total periodic interest payments.



a. TRUE

b. FALSE

The market interest rate represents the true interest rate used by investors to value a company's bond issue.



a. TRUE

b. FALSE



When bonds are issued at a discount and the effective interest method is used for amortization, at each subsequent interest payment date, the cash paid is:



a. Less than the interest expense.

b. Equal to the interest expense.

c. Greater than the interest expense.

d. More than if the bonds had been sold at a premium.


An amortization schedule for a bond issued at a discount:



a. Has a carrying value that decreases over time.

b. Is contained in the balance sheet.

c. Is a schedule that reflects the changes in bonds payable over its term to maturity.

d. All of the other answers are correct.

Which of the following is true for bonds issued at a discount?



a. The stated interest rate is greater than the market interest rate.

b. The market interest rate is greater than the stated interest rate.

c. The stated interest rate and the market interest rate are equal.

d. The stated interest rate and the market interest rate are unrelated.


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I answered as follows: true, true, false, c,d,a.

Explanation / Answer

1. True
The discount amortization increases the carrying value of the debt.

2. TRUE
Issue price = PV of Interest expense + PV of face value

3. a. Less than the interest expense.

4. d. More than if the bonds had been sold at a premium.

5. b. The market interest rate is greater than the stated interest rate.

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