1) If a firm issues bonds with a contractual interest rate that is higher than the market interest rate, the bond is issued at a premium or a discount? Does this represent an addition to or reduction from the cost of borrowing?

2) Does being issued at a premium or a discount change any of the terms of the borrowing agreement?

3) Does contractual interest or effective interest better reflect the cost of borrowing? Why?

4) Is the interest expense recognized in the financial statements based on contractual interest payments or effect interest?

5) In your own words, describe time value of money as you would explain it to a friend or family member who has never taken an accounting/ finance/ economics course?

2. Is the interest expense recognized in the financial statements based on contractual interest payments or effect interest?