The amortization of bond discount increases the effective interest expense incurred each period for the issuer while amortization of bond premium decreases it.

Question

Quizplus · Accepted Answer

This statement is true. When a bond is issued at a discount, the effective interest rate is higher than the stated bond interest rate. Amortizing the discount increases the effective interest expense each period, bringing it closer to the stated rate. On the other hand, when a bond is issued at a premium, the effective interest rate is lower than the stated rate, and amortizing the premium decreases the effective interest expense each period.

The Amortization of Bond Discount Increases the Effective Interest Expense