The sale of bonds above face value
A) is a rare occurrence.
B) will cause the total cost of borrowing to be less than the bond interest paid.
C) will cause the total cost of borrowing to be more than the bond interest paid.
D) will have no net effect on Interest Expense by the time the bonds mature.

Question

Quizplus · Accepted Answer

When bonds are sold above their face value, the issuer receives more money upfront than the amount that will be repaid at maturity. This premium reduces the total cost of borrowing because the issuer pays interest on the face value of the bonds, not on the higher amount received. Thus, over the life of the bonds, the total cost of borrowing (interest expense plus repayment of principal) is less than the total interest payments made to bondholders.

The Sale of Bonds Above Face Value