You graphed periodic interest expense and cash interest paid over the life of a bond.You noticed that the periodic interest expense line is increasing and greater than the cash interest paid line.Identify the statement below that is best described by the graph you drew.

Question

Quizplus · Accepted Answer

When the periodic interest expense line is greater than the cash interest paid line, it indicates that the bond was issued at a discount. This is because the periodic interest expense line represents the interest expense that is being accrued and amortized over the life of the bond, while the cash interest paid line represents the actual interest payments made in cash. When a bond is issued at a discount, the periodic interest expense will be higher than the cash interest paid because the borrower received less cash upfront than the face value of the bond and therefore must pay more in interest over the life of the bond to compensate the lender.

You Graphed Periodic Interest Expense and Cash Interest Paid Over