Regardless of Whether the Straight-Line Method or the Effective-Interest Method

question 27

True/False

Regardless of whether the straight-line method or the effective-interest method is used, the carrying value of a bond issued at a discount will decrease continually over the bond's life.

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Definitions:

Deferred Call

Call provision prohibiting the company from redeeming the bond before a certain date.

Coupon Rate

The interest rate on a bond, expressed as a percentage of the bond's face value, paid by the bond issuer to the bondholder at specified intervals.

Zero-Coupon Bond

A bond that does not pay periodic interest, but is issued at a deep discount, with the return being the difference between the purchase price and the face value at maturity.

Stripped Bond

A debt security where the principal and regular coupon payments have been separated and are sold as individual securities.