Which is the preferred method to use when amortizing a bond discount or premium?
A)Market-interest rate method of amortization
B)Straight-line method of amortization
C)Effective-interest method of amortization
D)Both straight-line and market-interest rate methods of amortization are equally preferred.

Question

Quizplus · Accepted Answer

The effective-interest method of amortization is the preferred method to use when amortizing a bond discount or premium as it results in a more accurate amortization of the bond compared to the straight-line method. The effective-interest method considers the actual interest rate on the bond and produces a larger interest expense and a smaller amortization for a discount bond compared to the straight-line method. It also produces a smaller interest expense and a larger amortization for a premium bond compared to the straight-line method. The market-interest rate method is not preferred because it assumes a constant interest rate over the life of the bond and may result in fluctuations in the amount of interest expense and bond amortization.

Which Is the Preferred Method to Use When Amortizing a Bond