Match these terms with their definitions.
-The process used to determine the amount of interest to be recorded in each of the periods the liability is outstanding.
A)Bond
B)Contract, coupon, stated rate
C)Discount
D)Effective interest rate method
E)Face value, par value, principal
F)Interest amortization
G)Lease
H)Lessee
I)Lessor
J)Leverage
K)Long-term debt
L)Market rate, yield
M)Maturity
N)Premium
O)Straight-line method

Question

Quizplus · Accepted Answer

Interest amortization is the process of spreading out the interest payments on debt over the life of the loan or bond. It involves calculating the amount of interest expense to be recognized in each accounting period and adjusting the carrying amount of the liability accordingly. There are two primary methods of interest amortization:
D) Effective interest rate method - This method involves applying the market rate of interest at the time the debt was issued to the outstanding balance of the debt for each period. The amount of interest expense recognized is the product of this rate and the outstanding balance of the debt, which results in a varying interest expense and a fixed rate of amortization of any premium or discount on the debt.
O) Straight-line method - This method involves dividing the total interest expense or income over the life of the bond by the number of accounting periods in the life of the bond. This results in a fixed amount of interest expense or income being recognized in each period, regardless of the changing balance of the debt.
The other terms provided in the question are defined as follows:
A) Bond - A financial instrument representing a loan made by an investor to a borrower, typically corporate or governmental.
B) Contract, coupon, stated rate - The interest rate stated on a bond or loan agreement, which determines the periodic interest payments.
C) Discount - The amount by which a bond is sold below its face value.
E) Face value, par value, principal - The amount of money a bond will pay back at maturity; it is also the reference amount for calculating interest payments.
G) Lease - A contractual agreement where one party (the lessor) allows another party (the lessee) to use an asset for a specified period of time in exchange for periodic payments.
H) Lessee - The party in a lease agreement who has the right to use the asset.
I) Lessor - The party in a lease agreement who owns the asset and allows the lessee to use it.
J) Leverage - The use of borrowed funds to increase the potential return of an investment.
K) Long-term debt - Debt with a maturity of more than one year from the date of the financial statements.
L) Market rate, yield - The current rate of return demanded by the market for a bond or debt instrument, which may differ from the contract or coupon rate.
M) Maturity - The date on which a bond or loan is due to be repaid in full.
N) Premium - The amount by which a bond is sold above its face value.

Match These Terms with Their Definitions