If One Borrows $1,000 at 8 Percent Interest on a Discount

question 154

True/False

If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is 7.2 percent.

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Definitions:

Interest Expense

Interest expense is the cost incurred by an entity for borrowed funds, represented as a charge against earnings on the income statement.

Premium on Bonds Payable

The amount by which the proceeds from the issuance of bonds exceed their face value.

Discount on Bonds Payable

The gap between a bond's nominal value and its market price when the bond is traded at a price below its nominal value.

Carrying Value

The book value of an asset or liability, reflecting its original cost adjusted for factors such as depreciation or amortization.