On January 1,Year 1,Strang Incorporated issued bonds with a face value of $500,000,a stated rate of interest of 8%,and a 5-year term to maturity.The effective rate of interest was 10%.Interest is payable in cash on June 30 and December 31 of each year.Which of the following statements is true?
A)This bond was issued at a premium,and each semiannual cash payment is $25,000.
B)This bond was issued at a discount,and each semiannual cash payment is $20,000.
C)This bond was issued at a discount,and the annual interest expense is $40,000.
D)This bond was issued at a premium,and the annual interest expense is $40,000.

Question

Quizplus · Accepted Answer

When the market rate of interest is higher than the stated rate of interest,bonds will sell at a discount so as to increase the effective rate of interest to the market rate.
Semi-annual interest payment = Face value of $500,000 × 8% × 1/2 = $20,000

On January 1,Year 1,Strang Incorporated Issued Bonds with a Face