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15 January, 03:05

When bonds are sold at a premium and the effective interest method is used, at each subsequent interest payment date, the cash paid is:

A. Less than the effective interest.

B. Equal to the effective interest.

C. Greater than the effective interest.

D. More than if the bonds had been sold at a discount.

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  1. 15 January, 05:40
    0
    C. Greater than the effective interest.

    Explanation:

    example

    face value 1,000,000

    issued at 1,100,000

    premium of 100,000

    the bond rate is 8%

    and the effective rate is 6%

    1,100,000 x 6%/2 = 33,000 interest expense

    cash proceeds 1,000,000 x 8%/2 = 40,000 cash

    amortization on premium 40,000 - 33,000 = 7,000

    The cash payment (40,000) are greater than the effective interest (33,000)

    If that wouldn't be the case, he premium won't depreciate
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