Final answer:
The entry to record a semi-annual interest payment with the effective-interest method includes a debit to Interest Expense and credit to Bond Interest Payable (c). The present value of bonds is affected by interest rates, with higher rates decreasing the present value of future cash flows, making the bonds less appealing.
Step-by-step explanation:
The entry to record the first semi-annual interest payment on December 31, 2016, using the effective-interest method of amortization, will include a Debit to Interest Expense and a Credit to Bond Interest Payable. This method of accounting for bond interest recognizes the interest cost over time at a constant rate on the carrying amount of the bonds.
Considering a two-year bond issued at $3,000 with an 8% interest rate, the bond will pay $240 in interest annually. To determine the present value of the bond with a discount rate of 8%, each future cash flow needs to be discounted to its present value. If the discount rate increases to 11%, the present value of these cash flows will decrease, reflecting the higher current interest rates and thus a lower value of the future cash flows in today's terms.
With bonds, changes in interest rates affect their attractiveness to investors, and therefore, their market value. For example, if a local water company issues a $10,000 ten-year bond at 6%, and interest rates increase to 9% one year before maturity, the bond's value would decrease because investors could receive a higher interest rate elsewhere.