bond and interest interest, therefore, understand

sweetgirl

sorry i am bombarding the board with silly questions, please bear with me for a moment.

a company issues a bond. then the interest increases, what the impact on Debt-to-equity ratio

A. An increase
B. A decrease
C. No change

The correct answer is B decrease D/E ratio as an increase in interest rate reduces the cost/price of the bond, therefore reducing the debt without changing the equity

What i dont understand here is that a bond is a-held-to-maturity item. so its not marked to market and its change in value should not be reflected on the income statement. the amount of debt should be fixed at its historical cost. is this correct?



Edited 1 time(s). Last edit at Monday, April 19, 2010 at 12:45AM by lzen5.