A bond issued at a premium will pay periodic cash interest in excess of the amount of interest expense recognized for accounting purposes.

Question

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When a bond is issued at a premium, the cash interest payments will be higher than the interest expense recognized for accounting purposes because the coupon rate on the bond is higher than the prevailing market interest rate. This results in an effective interest rate that is lower than the coupon rate, which causes a portion of the premium to be amortized over the life of the bond as a reduction in interest expense.

A Bond Issued at a Premium Will Pay Periodic Cash