Final answer:
The effective-interest method of amortizing bond premium or discount will result in increased amortization only if the bonds were issued at a discount. Additionally, if the market interest rate increases after a bond is issued, the value of that bond will decrease because its fixed payments are discounted at the new, higher interest rate.
Step-by-step explanation:
When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will increase only if the bonds were issued at a discount. The amortization of the bond discount will increase because as the bond's book value approaches its maturity value, the interest expense increases due to the convergence of the book value toward the face value over the life of the bond.
Thinking about the concept of interest rate and bond value, suppose Ford is paying an interest rate on borrowed funds, and the market interest rate increases after the bond issuance. In response to the market interest rate rising from 3% to 4%, the value of the bond would decrease. This happens because the fixed payments set by the original interest rate are now being discounted at a higher rate, lowering the present value of these payments, as shown in the calculation example of the two-year bond.