On January 1, 2019, $40 million face amount of 5%, 20-year bonds were issued.The bonds pay interest on a semiannual basis on June 30 and December 31 each year.The market interest rates were slightly higher than 5% when the bonds were sold. Were these bonds issued at a premium or discount? Will the semiannual interest expense on these bonds be more than or less than the amount of interest paid on each payment date?
A)The bonds were issued at a discount, and the semiannual interest expense will be more than the amount of interest paid on each payment date.
B)The bonds were issued at a discount, and the semiannual interest expense will be less than the amount of interest paid on each payment date.
C)The bonds were issued at a premium, and the semiannual interest expense will be more than the amount of interest paid on each payment date.
D)The bonds were issued at a premium, and the semiannual interest expense will be less than the amount of interest paid on each payment date.

Question

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The bonds were issued at a discount because the market interest rates were higher than the coupon rate of 5%. Consequently, the semiannual interest expense will be more than the amount of interest paid, as the interest expense includes the amortization of the discount.

On January 1, 2019, $40 Million Face Amount of 5