Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

Financial Accounting

11. Long Term Liabilities

Introduction to Bonds and Bond Characteristics

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Multiple Choice

Which of the following statements is true of a bond that is issued at a discount?

The bond will pay no interest to investors.

The bond's stated interest rate is lower than the market interest rate at the time of issuance.

The bond is sold for more than its face value.

The bond's stated interest rate is higher than the market interest rate at the time of issuance.

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Verified step by step guidance

Step 1: Understand the concept of a bond issued at a discount. A bond is issued at a discount when its selling price is less than its face value. This typically happens when the bond's stated interest rate (coupon rate) is lower than the prevailing market interest rate.

Step 2: Analyze the relationship between the stated interest rate and the market interest rate. If the stated interest rate is lower than the market interest rate, investors will demand a discount to compensate for the lower return compared to other investments available in the market.

Step 3: Evaluate the options provided in the problem. The first option, 'The bond will pay no interest to investors,' is incorrect because bonds issued at a discount still pay interest based on their stated interest rate. The third option, 'The bond is sold for more than its face value,' is incorrect because a bond issued at a discount is sold for less than its face value. The fourth option, 'The bond's stated interest rate is higher than the market interest rate at the time of issuance,' is incorrect because this scenario would result in a bond being issued at a premium, not a discount.

Step 4: Identify the correct statement. The second option, 'The bond's stated interest rate is lower than the market interest rate at the time of issuance,' is correct because it explains why the bond is issued at a discount.

Step 5: Summarize the reasoning. Bonds issued at a discount occur when the stated interest rate is less attractive than the market interest rate, leading investors to pay less than the bond's face value to achieve a competitive yield.