Question 1: The market price of a bond issued at a discount is calculated by taking the present value of its principal amount using the market (effective) rate of interest
a. plus the present value of all future interest payments using the market (effective) rate of interest.
b. plus the present value of all future interest payments using the rate of interest stated on the bond.
c. minus the present value of all future interest payments using the market (effective) rate of interest.
d. minus the present value of all future interest payments using the rate of interest stated on the bond.
Question 2: When the interest payment dates of a bond are May 1 and November 1, and the bond is issued on June 1, the amount of interest expense at December 31 of the year of issuance would be for
a. two months.
b. six months.
c. seven months.
d. eight months.
Question 3: For a bond issue that sells for more than its face value, the market rate of interest is
a. dependent on the rate stated on the bond.
b. equal to the rate stated on the bond.
c. less than the rate stated on the bond.
d. higher than the rate stated on the bond.
Question 4: When interest expense is calculated using the effective-interest amortization method, interest expense (assuming that interest is paid annually) always equals the
a. actual amount of interest paid.
b. book value of the bonds multiplied by the stated interest rate.
c. book value of the bonds multiplied by the effective interest rate.
d. maturity value of the bonds multiplied by the effective interest rate.