Times Company issued a $100,000 bond with a stated interest rate of 8 percent. When the bond was issued, the market rate was 6 percent. The bond matures in 10 years and pays interest on December 31 each year. The bond was issued on January 1, 2003.

Required: 1. Compute the present value of the difference between the interest paid each year ($8,000) and the interest demanded by the market ($1 00,000 X 6% = $6,000). Use the market rate of interest and the 10-year life of the bond in your present value computation. Discuss what this demonstrates. 2. Why does interest expense change each year when the effective-interest method is used? 3. Compute the present value of the Times Company bonds, assuming that they had a 7-year life instead of 10-year life. Compare this amount to the book value of the bond at the end of year 2005.

What does this comparison demonstrate?