Interest Expense on a Discount Bond: Changes Over Time

Interest Expense on a Discount Bond

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Question

The interest expense on a discount bond _______ over time.

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A. B. C. D.

D

Remember that the book value of the liability of any straight bond equals the face value at maturity. Hence, when the bond is issued at a discount, the discount amount is amortized over the life of the bond. The outstanding liability thus increases steadily toward the face value. The increasing liability increases the interest expense over time.