Final answer:
The question involves the adjustment of a bond's price when market interest rates exceed the bond's coupon rate, impacting its valuation and the journal entry for interest payments under the effective interest method.
Step-by-step explanation:
The question relates to the accounting and financial principles associated with bond valuation under different market interest rates. Specifically, it details how the price of a bond adjusts when the market interest rate exceeds the bond's coupon rate.
When a company issues a bond, it sets a coupon rate indicating the interest it will pay to bondholders. If prevailing market interest rates rise above the bond's coupon rate, the bond's price will generally decrease to yield a return attractive enough to match current market conditions. For a bond paying semi-annual interest, an example would be a $3,000 bond with an 8% coupon. If the market rate rises to, say, 11%, the bond's price will dip below its par value to compensate for the lower interest payments relative to new bonds issued at the higher current rate.
The answer also involves discussing the effective interest method of amortization for the journal entry needed to record the interest payment of a bond sold at a discount due to the market rate being higher than the contract rate.