Ask Question
9 November, 21:17

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A. Less than the effective interest.

B. Equal to the effective interest.

C. Greater than the effective interest.

D. More than if the bonds had been sold at a discount.

+3
Answers (1)
  1. 9 November, 22:06
    0
    C. Greater than the effective interest.

    Explanation:

    example

    face value 1,000,000

    issued at 1,100,000

    premium of 100,000

    the bond rate is 8%

    and the effective rate is 6%

    1,100,000 x 6%/2 = 33,000 interest expense

    cash proceeds 1,000,000 x 8%/2 = 40,000 cash

    amortization on premium 40,000 - 33,000 = 7,000

    The cash payment (40,000) are greater than the effective interest (33,000)

    If that wouldn't be the case, he premium won't depreciate
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is: A. ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers