Does the straight-line or effective interest method produce an interest expense allocation that yields a constant rate of interest over a bond’s life? Explain.

Expert Solution

Step 1: Definition of Straight-Line Method

The effective interest rate method is a method to calculate the interest on the bonds where the payment of interest remains the same but the interest rate changes according to the market rate.

Step 2: Explanation for interest rate is fixed effective interest method

In the effective interest method, the payments of the interest are variable means it changes every year but the interest rate is the same every year. From this, we can conclude that the payment may vary but the interest rate is the same. On the other hand, in the straight-line method the amount of interest remains the same all the years but the interest rate changes according to the market.

Hence, in the effective interest method interest rate remains the same.

Yes, the effective interest method produces an interest expense at a fixed interest rate during the whole life of the bond

Sahil Dangi answered 2 years ago

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