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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Bonds are sold at a premium if the

  1. market rate of interest was more than the stated rate at the time of issue.
  2. market rate of interest was less than the stated rate at the time of issue.
  3. company will have to pay a premium to retire the bonds.

issuing company has a better reputation than other companies in the same

To determine

Concept introduction:

Bonds:

Bonds are debt instruments issued by the borrower company to its lenders. Bonds are issued at a specified rate of interest and for a specified time period. The bondholders get a fixed rate of interest on the bonds and repayment of the bonds at the maturity date. Bonds may be issued at a premium or discount. The premium or discount on issue of binds is amortized or the life of bonds using the straight line or effective rate methods.

To choose:

The correct Statement about bonds payable issued at premium.

Explanation

Explanation for correct answer:

The effect of relationship between the market interest rate and bond stated rate on the price at which bonds are sold is shown as follow:

  • If Market interest rate is lower than the Bond Stated rate, the bonds shall be issued at Premium.
  • If Market interest rate is higher than the Bond Stated rate, the bonds shall be issued at Discount.

Hence the correct option is b.

Explanation for incorrect answers:

a...

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