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

For a bond issue that sells for more than the bond face amount, the effective interest rate is:

less than the stated interest rate

greater than the stated interest rate

equal to the stated interest rate

unrelated to the stated interest rate

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Verified step by step guidance

Understand the concept of bond pricing: Bonds can be issued at a premium (above face value), at par (equal to face value), or at a discount (below face value). The price at which a bond is sold depends on the relationship between the stated interest rate (coupon rate) and the effective interest rate (market rate).

Recognize the relationship between bond price and interest rates: When a bond sells for more than its face amount (premium), it indicates that the stated interest rate is higher than the effective interest rate. Investors are willing to pay more because the bond offers a higher return than the prevailing market rate.

Define the effective interest rate: The effective interest rate is the rate of return required by investors in the market. It reflects the current market conditions and is used to discount the bond's future cash flows to determine its present value.

Compare the stated interest rate and effective interest rate: For a bond issued at a premium, the effective interest rate is less than the stated interest rate because the bond's coupon payments are more attractive than what the market offers.

Conclude the relationship: Based on the above analysis, the effective interest rate for a bond issued at a premium is less than the stated interest rate. This is a key principle in bond valuation and pricing.