medium · Financial Accounting liabilities-bonds-payable
A company issues a bond with a 5% coupon rate when the market rate is 5%. Five years later, the market rate rises to 7%.
If the company continues to carry the bond at amortized cost, what is the effect of this market rate change on the company's financial statements?
- There is no effect on the carrying value or interest expense.
- The company must recognize an unrealized gain in Other Comprehensive Income.
- The carrying value of the bond will decrease to reflect the higher market rate.
- Interest expense will increase because market rates are higher.
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