ACCT 2101 Lecture Notes - Lecture 9: Effective Interest Rate, Relative Risk, Mirror Image
Document Summary
Interest accrues on an outstanding debt at a constant percentage of the debt each period. Interest each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period). Interest is recorded as expense to the issuer and revenue to the investor. On january 1, 2019, lauren industries issued ,000,000 of 10% bonds. The bonds mature in three years [an unrealistically short maturity to shorten the illustration]. The entire bond issue was sold in a private placement to abigail corporation, at face amount. On january 1, 2019, lauren industries issued ,000,000 of 10% bonds, dated january 1. Interest is payable semiannually on june 30 and december 31. The market yield for bonds of similar risk and maturity is 12%. The entire bond issue was purchased by abigail corporation. Since less cash is paid each period than the effective interest, the unpaid difference increases the outstanding balance of the debt.
