University of Central Florida (UCF) ACG3173 Accounting for Decision-Makers Exam 3 Practice

When considering bonds issued at a discount, it is important to understand the relationship between coupon payments and interest expenses. A bond issued at a discount means it is sold for less than its face value. This situation arises typically because the coupon rate (the interest rate stated on the bond) is lower than the prevailing market interest rates at the time the bond is issued.

Consequently, when the company pays its coupon payments to bondholders, those payments will be lower than the total interest expense recognized on the company's financial statements. Interest expense for a bond is calculated based not only on the actual cash payments made to bondholders (the coupon payments) but also includes the amortization of the bond discount over time. This amortization increases the effective interest expense that the issuer recognizes. Therefore, since the coupon payments are lower and the interest expense includes both the coupon payment and the amortized discount, it is accurate to state that a bond issued at a discount has coupon payments that are lower than the interest expense.

This highlights the key accounting principle that a bond’s effective interest expense includes both the cash outflow for coupon payments and the additional expense incurred through the amortization of the discount, aligning with why the chosen answer is correct. The other options, which explore