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

Discount on Bonds

Financial Accounting

11. Long Term Liabilities

Discount on Bonds

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Multiple Choice

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

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

The bond will not require any interest payments to bondholders.

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

The bond will be sold at an amount greater than its face value.

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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 incorrect options. For example, the statement 'The bond's stated interest rate is higher than the market interest rate at the time of issuance' is false because a bond issued at a discount occurs when the stated interest rate is lower, not higher.

Step 4: Address the statement 'The bond will not require any interest payments to bondholders.' This is incorrect because bonds, regardless of being issued at a discount, still require periodic interest payments based on the stated interest rate.

Step 5: Confirm the correct statement. The correct answer is 'The bond's stated interest rate is lower than the market interest rate at the time of issuance,' as this explains why the bond is sold at a discount.