Weather Corp.issued 10-year, 8%, $100,000 bonds paying interest on an annual basis, at a $5,200 premium.Which one of the following statements is true?

Question

Quizplus · Accepted Answer

The premium paid by investors ($5,200) will be amortized over the life of the bond, resulting in a lower effective interest rate for Weather. Therefore, the annual interest expense on the bonds will be less than the amount of interest payments to bondholders each year. Option A is incorrect as a result. Option C is incorrect as it suggests that the issue price is less than the face value plus premium, which is not the case. Option D is incorrect as the annual interest payments will be $8,000 (8% of $100,000) split into two payments of $4,000 each.