Adidas issued 10-year,8% bonds with a par value of $200,000.Interest is paid semiannually.The market rate on the issue date was 7.5%.Adidas received $206,948 in cash proceeds.Which of the following statements is true?

Question

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Since Adidas received $206,948 in cash proceeds at the issuance of the bonds, which is more than the par value ($200,000), the bonds were issued at a premium. The premium amount is $206,948 - $200,000 = $6,948. This premium will be amortized over the life of the bond and will reduce the effective interest rate. The effective interest rate is calculated to be 7.67%, which is less than the stated rate of 8%. Therefore, Adidas must pay $200,000 at maturity (par value) plus 20 interest payments of $8,000 each (8% of $200,000).

Adidas Issued 10-Year,8% Bonds with a Par Value of $200,000