The Effective-Interest Method of Amortization of Bond Premiums and Discounts

question 241

Multiple Choice

The effective-interest method of amortization of bond premiums and discounts is considered superior to the straight-line method because it results in a(n)

• A)interest rate that is close to the market interest rate.
• B)uniform rate of interest.
• C)more variable interest rate.
• D)interest rate that increases or decreases slightly over time.

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Definitions:

Payback Periods

The length of time required to recover the original investment cost through the generated returns.

Profitable

A financial state where earnings exceed expenses, resulting in a positive net income.

Discount Rate

The discount rate applied in DCF analysis to calculate the current value of future cash flows.

Net Present Value

The discrepancy between the current worth of incoming cash and the current worth of outgoing cash over a certain timeframe, utilized in the process of capital budgeting to evaluate an investment's profitability.