Multiple Choice
Which of the following organizations used bonds to issue new mortgages to families currently in default and to prevent foreclosure?
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11. Long Term Liabilities
Introduction to Bonds and Bond Characteristics
Multiple Choice
Which of the following is true for bonds issued at a discount?
A
The carrying value of the bonds decreases over time.
B
The bonds are sold for less than their face (par) value.
C
The bonds are sold for more than their face (par) value.
D
The stated interest rate is higher than the market interest rate.
Verified step by step guidance1
Step 1: Understand the concept of bonds issued at a discount. Bonds are issued at a discount when their selling price is less than their face (par) value. This typically happens when the stated interest rate on the bond is lower than the prevailing market interest rate.
Step 2: Analyze the relationship between the stated interest rate and the market interest rate. When the stated interest rate is lower than the market interest rate, investors are less willing to pay the full face value of the bond, resulting in the bond being sold at a discount.
Step 3: Evaluate the carrying value of bonds issued at a discount. Over time, as interest expense is recognized and the discount is amortized, the carrying value of the bond increases until it equals the face value at maturity.
Step 4: Compare the options provided in the problem. The correct answer should align with the definition of bonds issued at a discount, which is that they are sold for less than their face (par) value.
Step 5: Eliminate incorrect options. For example, the carrying value of bonds issued at a discount does not decrease over time—it increases. Bonds sold for more than their face value are issued at a premium, not a discount. Lastly, the stated interest rate being higher than the market interest rate would result in a premium, not a discount.
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