If a bond is issued at a premium, which statement is true regarding coupon payments and interest expense?

When a bond is issued at a premium, it means that the bond's selling price is higher than its face value. This situation typically occurs when the coupon rate, which is the interest rate stated on the bond, is higher than the market interest rate.

In this context, the coupon payments are made to bondholders based on the coupon rate. Since the bond was issued at a premium, the company pays out these higher coupon payments over the life of the bond. However, the interest expense that the company recognizes for accounting purposes is calculated based on the effective interest method. The effective interest expense is lower than the actual cash outflows for the coupon payments because a portion of the premium is amortized each period. This amortization reduces the overall interest expense reflected on the income statement.

Consequently, while the company pays out a higher coupon payment to bondholders, the recognized interest expense for accounting purposes will be less than the cash payments. This leads to the conclusion that the coupon payment is indeed higher than the interest expense recognized in the financial statements.