The effective-interest method of amortizing bond premiums

Question

Quizplus · Accepted Answer

The effective-interest method uses a constant interest rate (the market rate at the time the bonds were issued) to calculate interest expense for each period, which reflects the actual economic reality better than the straight-line method. This method is not too complicated for practical use, is not the same as the straight-line method, and does not determine the cash to be paid to bondholders, as the cash amount is fixed and determined by the stated (coupon) interest rate.

The Effective-Interest Method of Amortizing Bond Premiums