If the market rate of interest is
A) less than the stated rate, interest expense will be equal to interest paid.
B) greater than the stated rate, interest expense will be equal to interest paid.
C) less than the stated rate, interest expense will be less than interest paid.
D) equal to the stated rate, interest expense will be less than interest paid.
E) less than the stated rate, interest expense will be greater than interest paid.

Question

Quizplus · Accepted Answer

Interest expense is calculated using the stated rate, while interest paid is the actual amount of interest paid. If the market rate of interest is less than the stated rate, the present value of the future cash flows will be greater than the face amount of the debt, resulting in interest expense being less than interest paid.

If the Market Rate of Interest Is