A year-by-year transfer of wealth from bondholders to stockholders occurs when the market rate of interest increases and the historical cost accounting model is used to account for bonds.

Question

Quizplus · Accepted Answer

When the market rate of interest increases, the value of existing bonds decreases, benefiting stockholders as the company's cost of borrowing is effectively reduced under historical cost accounting.

A Year-By-Year Transfer of Wealth from Bondholders to Stockholders Occurs