Question

Ipswich Industries plans to issue 5-year, 6%, $500,000 bonds paying interest on an annual basis, at a $3,500 discount. Which one of the following statements is true? Select one: O A. The cash paid to bondholders will be $3,500 each year. o B. Ipswich's annual interest expense on the bonds will be greater than the amount of interest payments to bondholders each year. o C. The effective rate of interest on the bonds is lower than 6%. o D. Ipswich will receive $503,500 as the issue price.

Answer 1

Correct answer-----------(B) Ipswich's annual interest expense on bonds will be greater than the amount of interest payment to bondholders each year.  

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The interest in cash will be lower than interest expense and the effective interest will be greater than 6% that is why the bond is issue at discount.

Cash received on issue would be (500000-3500) $ 496,500.