3 If the market interest rate is higher than the face intere

3. If the market interest rate is higher than the face interest rate at the date of issuance, bonds will a. sell at face value. b. not sell until the face interest rate is adjusted. c. sell at a premium. d. sell at a discount. 4. In 2013, Sells Inc, issued ten-year, 10 percent bonds when the market interest rate was 12 percent.Interest is payable annually. During 2,016, the market rate of interest for similar bonds was 14 percent.Using the effective interest method of amortization, what interest rate will be used to calculate interest expense for 2016? a. 12 percent b. 10 percent c. 14 percent d. 4 percent

Solution

Q3. Answer: d

The bonds will be issued at discount. Since the market rate is higher, the bonds will be attractive only if it is sold lower than the face value (called discount).

Q4. Answer: c

Market rate of interest is the same as effective interest rate. The effective interest rate in the year 2016 is 14%.