Bonds Payable Theory Q- Effective Interest Method

What is the interest rate written on the face of the bond?

• Coupon rate

• Nominal rate

• Stated rate

• Coupon rate

What is the rate of interest actually incurred?

• Market rate

• Yield rate

• Effective rate

• Market, yield or effective rate

When the effective interest method is used, the periodic amortization would

• Increase if the bonds were issued at a discount

• Decrease if the bonds were issued at a premium

• Increase if the bonds were issued at a premium

• Increase if the bonds were issued at either a discount or a premium

A discount on bond payable is charged to interest expense

• Equally over the life of the bond

• Only in the year the bond is issued

• Using the effective interest method

• Only in the year the bond matures

What is the effective interest rate of a bond measured at

amortized cost?

• The stated rate of the bond.

• The interest rate currently charged by the entity or by

  others for similar bond.

• The interest rate that exactly discounts estimated future cash payments through the expected life of the bond or when appropriate, a shorter period to the net carrying amount of the bond.

• The basic risk-free interest rate that is derived from observable government bond prices

For a bond issue which sells for less than face amount, the market rate of interest is

• Dependent on rate stated on the bond

• Dependent on rate stated on the bond

• Less than rate stated on the bond

• Higher than rate stated on the bond

What is the market rate of interest for a bond issue which sells for more than face amount?

• Less than rate stated on the bond

• Equal to rate stated on the bond

• Higher than rate stated on the bond

• Independent of rate stated on the bond

If bonds are issued at a premium, this indicates that

• The yield rate of interest exceeds the nominal rate b. The nominal rate of interest exceeds the yield rate c. The yield and nominal rates coincide

• The nominal rate of interest exceeds the yield rate

• The yield and nominal rates coincides

• No necessary relationship exists between the two rates

Which statement is true for a bond maturing on a single date when the effective interest method of amortizing bond

discount is used?

• Interest expense as a percentage of the bond carrying amount varies from period to period

  Interest expense increases each six-month period

• Interest expense increases each six-month period

• Interest expense remains constant each six-month period

• Nominal interest rate exceeds effective interest rate

The market price of a bond issued at a discount is the present value of the principal amount at the market rate of interest

• Less the present value of all future interest payments at the market rate of interest.

• Less the present value of all future interest payments at the rate of interest stated on the bond.

• Plus the present value of all future interest payments at the market rate of interest.?

• Plus the present value of all future interest payments at the rate of interest stated on the bond.