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Basic Question 2 of 21
If a company issues debt at a premium, and it uses the effective interest method to account for interest and premium amortization, the debt's interest expense and its book value, respectively, will behave as follows over the term of the bond issue:
B. decrease; decrease
C. decrease; increase
A. increase; decrease
B. decrease; decrease
C. decrease; increase
User Contributed Comments 2
| User | Comment |
|---|---|
| achu | Remember: interest expense calc'd using ieff * Bond BV. Thus they both change in SAME direction. |
| khalifa92 | value reduced til par. interest exp reduced to offset the premium received. |
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Learning Outcome Statements
determine the initial recognition, initial measurement and subsequent measurement of bonds;
describe the effective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments;
CFA® 2024 Level I Curriculum, Volume 3, Module 25.