Question

when using the effective-interest method of bond amortization, interest expense each payment if the bonds were issued at a premium. multiple choice question. decreases increases stays the same

Answer 1

The interest expense each payment decreases when using the effective-interest method of bond amortization for bonds issued at a premium.

Step-by-step explanation:

The interest expense each payment when using the effective-interest method of bond amortization would decrease if the bonds were issued at a premium. The effective-interest method adjusts the interest expense based on the changing discount rate applied to the bond's future cash flows. When bonds are issued at a premium, the coupon rate is higher than the market interest rate, leading to a lower effective interest rate. As a result, the interest expense each payment decreases.

Answer 2

Using the effective-interest method of bond amortization for a bond issued at a premium, the interest expense each payment decreases over time. Interest rates rising above a bond's coupon rate makes it less valuable; hence, a bond will generally be priced below its face value.

Step-by-step explanation:

When using the effective-interest method of bond amortization, if the bonds were issued at a premium, the interest expense each payment decreases over time. This is because the carrying amount of the bond decreases as the premium is amortized, leading to lower interest expense calculations in subsequent periods. As the carrying amount of the bond gets closer to its face value, the interest expense recognized in the income statement diminishes.

If interest rates increase, one would typically expect to pay less than $10,000 for a $10,000 bond because the present value of the bond's future payments is discounted at a higher rate, making the investment less valuable. Conversely, if interest rates decrease, a bond's value will generally increase, since the present value of the bond's future payments is discounted at a lower rate, making the investment more attractive.