Kieso, Weygandt, Warfield, Young, Wiecek Intermediate Accounting, Eighth Canadian Edition 14-4 7. Bonds are issued with a stated rateof interest expressed as a percentage of the face valueof the bonds. When bonds are sold for more than face value (at a premium) or less than face value (at a discount), the interest rate actually earned by the bondholder is different from the stated rate. This is known as the effective yieldor market rateof interest and is set by economic conditions in the investment market. The effective yield exceeds the stated rate when the bonds sell at a discount, and the effective yield is less than the stated rate when the bonds sell at a premium. 8. To compute the effective interest rate of a bond issue, the present value of future cash flows from interest and principal must be computed. Discounts and Premiums 9. Premiums and discounts resulting from a bond issue are recorded at the time the bonds are sold. These items are amortized each time bond interest is paid. The time period over
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