Final answer:
Using the effective interest method results in a constant rate of interest over a bond's term. A bond's value decreases if the market interest rate rises after issuance, as the fixed rate of interest becomes relatively less attractive. Option a.
Step-by-step explanation:
The use of the effective interest method to account for financing liabilities most likely results in a constant rate of interest over the bond's term. When a company like Ford issues bonds, it pays interest on the borrowed funds at a specific annual rate, which remains fixed throughout the term of the bond unless it is a variable rate bond. For instance, if Ford issued bonds with an 8% annual rate, it would promise to pay this interest rate until the bond matures.
If the market interest rate rises from 3% to 4% a year after Ford issues the bonds, the value of the bond will decrease. This is because the bond's fixed interest rate becomes less attractive when new bonds are available at a higher rate. Given the inverse relationship between bond values and market interest rates, investors would only be willing to buy Ford's existing bonds at a discount, meaning less than their face value.