Eaton Company issued $5 million of bonds with a 10% coupon rate of interest. When Eaton issued the bonds, the market rate of interest was 8%. Which of the following statements is incorrect?

Question

Quizplus · Accepted Answer

The statement "The annual interest expense will increase if the effective-interest method of amortization was used" is incorrect. The effective-interest method of amortization results in a constant interest expense each year, regardless of whether the market rate of interest is higher or lower than the coupon rate. Therefore, the annual interest expense would not increase if the effective-interest method was used.

Eaton Company Issued $5 Million of Bonds with a 10