Financial Accounting Quiz: Bond Issuance
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Bond IssuanceQuestion 1 of 20

On January 1, 20X1, a company issues 10-year, zero-coupon bonds with a face value of $5,000,000. The market interest rate for these bonds is 5%, compounded annually. What are the cash proceeds from this bond issuance, rounded to the nearest dollar?

$5,000,000
$3,118,047
$3,069,566
$2,500,000
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Financial Accounting Quiz

Financial Accounting Quiz: Bond Issuance

Practice Bond Issuance in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Bond Issuance, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

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Question 1

On January 1, 20X1, a company issues 10-year, zero-coupon bonds with a face value of $5,000,000. The market interest rate for these bonds is 5%, compounded annually. What are the cash proceeds from this bond issuance, rounded to the nearest dollar?

  1. $5,000,000
  2. $3,118,047
  3. $3,069,566 (correct answer)
  4. $2,500,000
Explanation: Zero-coupon bonds do not make periodic interest payments. The only cash flow investors receive is the face value at maturity. Therefore, the issue price (cash proceeds) is simply the present value of the single lump-sum principal payment, discounted at the market rate.\n- Calculation: Issue Price = Face Value ×\times PV(i=5%, n=10) = (5,000,000 \times 0.613913\) = \3,069,565.\n\nDistractor Analysis:\n* A: The face value, which ignores the time value of money.\n* B: This value results from incorrectly using a different rate or number of periods, for example PV(i=5%, n=10) compounded semi-annually (n=20, i=2.5%), which is incorrect as the problem states annual compounding.\n* D: A simple, but incorrect, calculation like dividing the face value by two.

Question 2

A company issues bonds with a face value of $1,000,000, receiving gross proceeds of $1,050,000 from investors. The company pays $15,000 in issuance fees to the underwriter. How should this transaction be reported on the Statement of Cash Flows?

  1. Cash inflow from financing activities of $1,065,000.
  2. Cash inflow from financing activities of $1,050,000.
  3. Cash inflow from investing activities of $1,050,000.
  4. Cash inflow from financing activities of $1,035,000. (correct answer)
Explanation: The Statement of Cash Flows reports actual net cash flows. Bond issuance is a financing activity. The company received $1,050,000 from investors but paid $15,000 in fees, resulting in a net cash inflow of $1,035,000 from financing activities. Distractor Analysis:
  • A: Incorrectly adds the fees to gross proceeds.
  • B: Reports gross proceeds, ignoring the cash outflow for fees.
  • C: Incorrectly classifies as investing activity; bond issuance is financing.

Question 3

A company issues 10-year bonds with a face value of $1,000,000 and a stated interest rate of 5%, paid annually. The market interest rate on the date of issue is 7%. The present value of the interest payment annuity is $351,179. What is the total issue price of the bonds?

  1. $351,179
  2. $508,349
  3. $859,528 (correct answer)
  4. $1,000,000
Explanation: The issue price of a bond is the sum of the present value of its two cash flow components: the principal (lump sum) and the interest payments (annuity), both discounted at the market rate.
  1. PV of Interest Payments: Given as $351,179.
  2. Calculate PV of Principal: We must discount the $1,000,000 face value at the market rate of 7% for 10 years. \text{PV} = \1,000,000 / (1.07)^{10} = $1,000,000 \times 0.508349 = $508,349.\n3. **Total Issue Price**: PV of Interest + PV of Principal = \(351,179 + $508,349 = $859,528).\n\nDistractor Analysis:\n* A: Represents only the present value of the interest payments.\n* B: Represents only the present value of the principal.\n* D: The face value, which ignores discounting.

Question 4

On January 1, 2024, Meridian Corp. issued $500,000 of 8% bonds at 102. The bonds pay interest semiannually on June 30 and December 31, and mature in 5 years. What is the total amount of cash Meridian received from the bond issuance, and how should the premium be classified on the balance sheet immediately after issuance?

  1. $510,000 cash received; premium classified as a contra-liability account reducing bonds payable
  2. $510,000 cash received; premium classified as an addition to bonds payable in the long-term liabilities section (correct answer)
  3. $520,000 cash received; premium classified as deferred revenue in current liabilities
  4. $520,000 cash received; premium classified as an addition to bonds payable in the long-term liabilities section
Explanation: When bonds are issued at 102, this means 102% of face value. Cash received = $500,000 × 1.02 = $510,000. The premium on bonds payable is classified as an addition to (not reduction of) the bonds payable account in long-term liabilities. Choice A has the correct cash amount but incorrectly treats premium as contra-liability (that would be discount). Choice C incorrectly calculates cash as $520,000 and misclassifies premium as deferred revenue. Choice D has the wrong cash calculation.

Question 5

On January 1, 20X1, a company issued $3,000,000 of 5-year bonds at 97. What is the carrying value of the bonds immediately after issuance?

  1. $2,910,000 (correct answer)
  2. $3,000,000
  3. $3,090,000
  4. $2,900,000
Explanation: The carrying value of bonds on the date of issuance is equal to their issue price (assuming no issuance costs). A quote of '97' means the bonds were issued at 97% of their face value.\n- Issue Price / Carrying Value: (3,000,000 \times 0.97 = \2,910,000).\nThe journal entry would be: Dr. Cash $2,910,000; Dr. Discount on Bonds Payable $90,000; Cr. Bonds Payable $3,000,000. The carrying value is the face value less the discount: $3,000,000 - $90,000 = $2,910,000.\n\nDistractor Analysis:\n* B: The face value of the bonds.\n* C: The result of incorrectly applying the quote as a premium (103%).\n* D: A calculation error, perhaps using 3% of a different number.

Question 6

On January 1, 20X1, Sterling Corp. issued $800,000 of 7%, 20-year bonds to yield 6%. Interest is payable semi-annually on June 30 and December 31. What is the initial carrying value of the bonds on the issuance date, rounded to the nearest dollar?

  1. $800,000
  2. $710,682
  3. $892,336
  4. $914,203 (correct answer)
Explanation: Since the stated rate (7%) is higher than the market yield (6%), the bonds are issued at a premium. The calculation must use semi-annual periods and rates.\n- Number of periods (n) = 20 years ×\times 2 = 40\n- Market rate per period (i) = 6% / 2 = 3%\n- Interest payment per period = (800,000 \times 7\%\) / 2 = \28,000\n\n1. PV of Principal: (800,000 \times \text{PV}(\text{i}=3\%, \text{n}=40)\) = \(800,000 \times 0.306557) = $245,246\n2. PV of Interest Payments: (28,000 \times \text{PVOA}(\text{i}=3\%, \text{n}=40)\) = \(28,000 \times 23.114772) = $647,214\n3. Issue Price (Initial Carrying Value): (245,246 + \647,214 = $914,200). Rounding may vary slightly; $914,203 is the precise answer.\n\nDistractor Analysis:\n* A: Face value, which occurs only if the stated and market rates are equal.\n* B: The result of incorrectly calculating a discount instead of a premium.\n* C: The result of incorrectly using annual periods (n=20, i=6%) and an annual interest payment of $56,000.

Question 7

On March 1, 20X1, Ambit Corp. issues $1,000,000 of 9% bonds dated January 1, 20X1. The bonds were issued at 98 plus accrued interest. Interest is payable semi-annually on January 1 and July 1. What are the total cash proceeds received by Ambit on the issuance date?

  1. $980,000
  2. $995,000 (correct answer)
  3. $965,000
  4. $1,025,000
Explanation: When bonds are issued between interest dates, the issuer collects the issue price of the bonds plus the interest that has accrued from the last interest date to the issue date.\n1. Issue Price of Bonds: The quote '98' means 98% of face value. (1,000,000 \times 0.98 = \980,000).\n2. Accrued Interest: Interest has accrued for two months (January and February). Accrued Interest = Face Value ×\times Stated Rate ×\times Time = (1,000,000 \times 9\% \times (2/12) = \15,000).\n3. Total Cash Proceeds: Issue Price + Accrued Interest = (980,000 + \15,000 = $995,000).\n\nDistractor Analysis:\n* A: Represents the issue price of the bonds only, ignoring the accrued interest.\n* C: Incorrectly subtracts the accrued interest from the issue price.\n* D: Represents a premium issue (e.g., at 101) plus accrued interest, which misinterprets the facts.

Question 8

The following journal entry was recorded by a corporation for a bond issuance:\n\nCash..............................965,000\nDiscount on Bonds Payable...35,000\n Bonds Payable................1,000,000\n\nBased on this entry, which statement is true regarding the interest rates associated with the bonds?

  1. The stated interest rate was higher than the market interest rate.
  2. The stated interest rate was lower than the market interest rate. (correct answer)
  3. The stated interest rate was equal to the market interest rate.
  4. The effective interest rate is lower than the nominal interest rate.
Explanation: The journal entry includes a debit to Discount on Bonds Payable. A discount arises when the cash proceeds ($965,000) are less than the face value of the bonds ($1,000,000). This occurs because the interest payments offered by the bond (the stated rate) are less attractive to investors than what they could earn on other similar investments in the market (the market rate). To compensate for the lower stated rate, investors pay less than face value for the bonds. Therefore, the stated interest rate was lower than the market interest rate.\n\nDistractor Analysis:\n* A: This relationship would result in a premium.\n* C: This relationship would result in the bonds being issued at face value (par).\n* D: The effective rate is another term for the market rate, and the nominal rate is another term for the stated rate. This statement claims the market rate is lower than the stated rate, which is incorrect.

Question 9

Immediately after a bond issuance, a company's balance sheet showed Bonds Payable of $1,500,000 and a related unamortized Premium on Bonds Payable of $67,500. Assuming no bond issuance costs, what were the cash proceeds from this transaction?

  1. $67,500
  2. $1,432,500
  3. $1,500,000
  4. $1,567,500 (correct answer)
Explanation: The carrying value of bonds issued at a premium is the face value plus the unamortized premium. On the date of issuance, the cash proceeds are equal to the initial carrying value (assuming no issuance costs).\n- Carrying Value = Face Value + Premium\n- Carrying Value = (1,500,000 + \67,500 = $1,567,500).\nTherefore, the cash proceeds were $1,567,500.\n\nDistractor Analysis:\n* A: The amount of the premium itself.\n* B: The result of incorrectly subtracting the premium from the face value, as if it were a discount.\n* C: The face value of the bonds, which would only be the proceeds if they were issued at par.

Question 10

On April 1, 20X1, GeoTech Corp. issued $500,000 of 8% bonds, dated January 1, 20X1, at 101 plus accrued interest. Interest is paid on January 1 and July 1. The journal entry to record this issuance will include a credit to Interest Payable of:

  1. $0
  2. $10,000 (correct answer)
  3. $20,000
  4. $40,000
Explanation: When bonds are issued between interest dates, the issuer collects accrued interest from the buyer. This amount is credited to Interest Payable (or Interest Expense) because the issuer must pay a full six months of interest on the next interest date (July 1), and this credit offsets part of that future payment.\n- Accrual Period: January 1 to April 1 = 3 months.\n- Accrued Interest Calculation: Face Value ×\times Stated Rate ×\times Time = (500,000 \times 8\% \times (3/12) = \10,000).\nThis $10,000 is credited to Interest Payable.\n\nDistractor Analysis:\n* A: Incorrectly assumes no accrued interest is recorded.\n* C: Represents a full semi-annual interest payment ($500,000 \times 8% \times 6/12).\n* D: Represents a full year's interest payment.

Question 11

A corporation issues bonds with a face value of $2,000,000 for $2,105,000 in cash. The company also pays $25,000 in bond issuance costs directly to its underwriter from the bond proceeds. What is the net premium or discount recorded at issuance?

  1. $105,000 premium
  2. $80,000 premium (correct answer)
  3. $25,000 discount
  4. $130,000 premium
Explanation: Bond issuance costs reduce the net proceeds from the bond issue and therefore reduce the premium or increase the discount.\n1. Gross Premium: Cash proceeds before costs - Face Value = (2,105,000 - \2,000,000 = $105,000).\n2. Net Premium: Gross Premium - Bond Issuance Costs = (105,000 - \25,000 = $80,000).\nThe journal entry would be a debit to Cash for $2,080,000 ($2,105,000 - $25,000), a credit to Bonds Payable for $2,000,000, and a credit to Premium on Bonds Payable for $80,000.\n\nDistractor Analysis:\n* A: Ignores the effect of the bond issuance costs.\n* C: Incorrectly nets the costs against face value, ignoring the premium.\n* D: Incorrectly adds the issuance costs to the gross premium.

Question 12

Apex Industries issued bonds with a face value of $600,000 for cash proceeds of $575,000. The company paid $8,000 in bond issuance costs from its general cash account. What is the initial carrying amount of the bonds on the balance sheet?

  1. $567,000 (correct answer)
  2. $575,000
  3. $583,000
  4. $600,000
Explanation: The initial carrying amount of bonds is the issue price net of any bond issuance costs. These costs increase the bond discount or decrease the bond premium.\n1. Initial Discount before costs: Face Value - Issue Price = (600,000 - \575,000 = $25,000).\n2. Total Discount: Initial Discount + Issuance Costs = (25,000 + \8,000 = $33,000).\n3. Initial Carrying Amount: Face Value - Total Discount = (600,000 - \33,000 = $567,000).\nAlternatively, Net Cash Proceeds = $575,000 (received) - $8,000 (paid) = $567,000, which is the initial carrying amount.\n\nDistractor Analysis:\n* B: The cash proceeds before considering issuance costs.\n* C: Incorrectly adds the issuance costs to the proceeds.\n* D: The face value of the bonds.

Question 13

Tandem Corp. plans to issue $5,000,000 of 6% coupon bonds. On the planned issuance date, the market rate for such bonds is 6%. Due to an unexpected market downturn just before issuance, the market rate for these bonds rises to 7%. What is the most likely consequence of this rate change on the bond issuance?

  1. The issuance will be cancelled, as the bonds can no longer be sold.
  2. The bonds will be issued at a premium.
  3. The bonds will be issued at a discount. (correct answer)
  4. Tandem will increase the coupon rate on the bonds to 7%.
Explanation: Bond prices and interest rates have an inverse relationship. The coupon rate (6%) is fixed by the bond indenture. When the market rate (the rate investors demand, 7%) rises above the coupon rate, the bond's fixed payments become less attractive. To entice investors, the company must sell the bonds for less than their face value. Selling bonds for less than face value means they are issued at a discount.\n\nDistractor Analysis:\n* A: The bonds can still be sold, just at a lower price.\n* B: A premium occurs when the market rate is lower than the coupon rate.\n* D: The coupon rate is part of the legal bond contract (indenture) and cannot be changed once it is set for issuance.

Question 14

A company issues 8%, 10-year bonds with a face value of $300,000 when the market interest rate is 9%. The cash proceeds from the issuance are $280,727. Which journal entry correctly records this transaction?

  1. Cash 280,727; Premium on Bonds Payable 19,273; Bonds Payable 300,000
  2. Cash 280,727; Discount on Bonds Payable 19,273; Bonds Payable 300,000 (correct answer)
  3. Cash 300,000; Discount on Bonds Payable 19,273; Bonds Payable 280,727
  4. Cash 280,727; Bonds Payable 280,727
Explanation: The bonds were issued for less than their face value, resulting in a discount. The journal entry must reflect the cash received, the face value of the bonds, and the difference as a discount.\n- Cash: Debited for the proceeds received, $280,727.\n- Bonds Payable: Credited for the face (par) value of the liability, $300,000.\n- Discount on Bonds Payable: Debited for the difference between face value and cash proceeds. (300,000 - \280,727 = $19,273). A discount is a contra-liability account and has a normal debit balance.\n\nDistractor Analysis:\n* A: Incorrectly records a premium instead of a discount.\n* C: Incorrectly debits Cash for face value and credits Bonds Payable for the proceeds.\n* D: Ignores the discount and records the liability at the cash proceeds value, which is incorrect.

Question 15

Viper Corp. issued $400,000 of 5% bonds at face value on January 1, 20X1. Viper incurred $10,000 in bond issuance costs, which were paid in cash to the underwriter. Which of the following is included in the journal entry to record the issuance?

  1. A credit to Bonds Payable for $390,000.
  2. A debit to Bond Issuance Expense for $10,000.
  3. A debit to Cash for $400,000.
  4. A debit to Discount on Bonds Payable for $10,000. (correct answer)
Explanation: When bonds are issued at face value, there is no initial premium or discount. However, bond issuance costs reduce the net proceeds and effectively create a discount. The costs are not expensed immediately.\n- Net cash received = $400,000 (from investors) - $10,000 (paid to underwriter) = $390,000.\n- The journal entry is: Debit Cash $390,000; Debit Discount on Bonds Payable $10,000; Credit Bonds Payable $400,000.\nTherefore, a debit to Discount on Bonds Payable for $10,000 is included in the entry.\n\nDistractor Analysis:\n* A: Bonds Payable is always credited for the full face value ($400,000).\n* B: Bond issuance costs are capitalized (as a reduction to carrying value via a discount/premium), not expensed at issuance.\n* C: The debit to cash is for the net proceeds ($390,000), not the face value.

Question 16

On July 1, 2024, Phoenix Corp. issued $1,200,000 of 5% bonds at 95, with interest payable annually each June 30. The bonds mature in 8 years. What journal entry should Phoenix record on the date of issuance?

  1. Debit Cash $1,140,000, Debit Discount on Bonds Payable $60,000, Credit Bonds Payable $1,200,000 (correct answer)
  2. Debit Cash $1,140,000, Credit Discount on Bonds Payable $60,000, Credit Bonds Payable $1,140,000
  3. Debit Cash $1,200,000, Credit Premium on Bonds Payable $60,000, Credit Bonds Payable $1,140,000
  4. Debit Cash $1,140,000, Credit Bonds Payable $1,140,000, Credit Interest Payable $60,000
Explanation: Bonds issued at 95 means 95% of face value. Cash received = $1,200,000 × 0.95 = $1,140,000. Discount = $1,200,000 - $1,140,000 = $60,000. The correct entry debits Cash and Discount on Bonds Payable, and credits Bonds Payable at face value. Choice B incorrectly credits (instead of debits) the discount account and shows wrong Bonds Payable amount. Choice C incorrectly treats the difference as a premium. Choice D omits the discount account and incorrectly shows Interest Payable.

Question 17

Quantum Corp. issued $900,000 of bonds with detachable stock warrants. The bonds have a stated rate of 3% and were issued when the market rate for similar bonds without warrants was 5%. The total proceeds were $875,000. If similar bonds without warrants would have sold at 90, what amount should be allocated to the bond liability and what amount to the warrants?

  1. Bond liability: $785,000; Warrants: $90,000, using the residual value method with warrants as primary
  2. Bond liability: $810,000; Warrants: $90,000, using the residual value method with bonds as primary
  3. Bond liability: $875,000; Warrants: $0, because the warrants are not separately tradeable at issuance
  4. Bond liability: $810,000; Warrants: $65,000, using the relative fair value method (correct answer)
Explanation: When you encounter bonds issued with detachable stock warrants, you need to allocate the total proceeds between the bond liability and the warrant equity using either the relative fair value method or the residual value method. The key is determining whether you have sufficient fair value information for both components. Here, you have enough information to use the relative fair value method. Similar bonds without warrants would sell at 90% of face value, giving the bonds a fair value of 900,000×0.90=$810,000900,000 × 0.90 = \$810,000. Since the total proceeds were $875,000, the warrants have an implied fair value of $875,000 - 810,000 = \65,000 . This allocation properly reflects the economic substance of issuing two distinct financial instruments. Answer A incorrectly uses 785,000 for bonds, which doesn't match the 90% calculation, and misapplies the residual method. Answer B correctly calculates the bond value at $810,000 but incorrectly allocates $90,000 to warrants using a residual approach when fair values are available for both components. The residual method should only be used when you can't determine fair value for one component. Answer C incorrectly records the entire proceeds as bond liability, ignoring the economic reality that investors paid extra for the warrant feature. Remember: when bonds are issued with detachable warrants and you have fair value information for both components, always use the relative fair value method to allocate proceeds. The "detachable" nature means the warrants can be exercised independently and have separate value that must be recognized.

Question 18

Sterling Inc. issued $1,500,000 of convertible bonds at par on January 1, 2024. Each $1,000 bond can be converted into 25 shares of Sterling's $10 par common stock. On the issue date, Sterling's stock was trading at $35 per share. Under U.S. GAAP, how should Sterling account for the conversion feature at issuance?

  1. Record the bonds at $1,500,000 and create a separate $312,500 liability for the conversion feature premium
  2. Allocate $843,750 to bond liability and $656,250 to additional paid-in capital for the conversion feature
  3. Record $1,312,500 as bond liability and $187,500 as equity for the embedded conversion option
  4. Record the entire $1,500,000 as bond liability, because the conversion feature is inseparable from the bonds (correct answer)
Explanation: When you encounter convertible bonds, you need to understand how U.S. GAAP treats these hybrid instruments differently from IFRS. Under U.S. GAAP, convertible bonds are generally recorded as a single unit without separating the debt and equity components. Sterling should record the entire $1,500,000 as bond liability because U.S. GAAP views the conversion feature as inseparable from the bonds themselves. The conversion option doesn't meet the criteria for separate recognition as a derivative under ASC 815, since it's clearly and closely related to the debt host contract. The bonds were issued at par, meaning investors paid face value, and the entire amount represents the bond obligation. Choice A incorrectly suggests creating a separate liability for the conversion premium, but U.S. GAAP doesn't require this bifurcation for typical convertible bonds. Choice B reflects IFRS treatment, which does require separating debt and equity components—but this question specifically asks about U.S. GAAP. The allocation amounts in B would be calculated using the residual method under IFRS, but that's not applicable here. Choice C also incorrectly attempts to separate the conversion option as equity, again mixing up U.S. GAAP with international standards or more complex derivative accounting. Remember this key distinction: U.S. GAAP keeps convertible bonds together as one unit, while IFRS splits them apart. Watch for exam questions that test whether you know which standard applies—the geographic location of the company or explicit mention of "U.S. GAAP" versus "IFRS" will guide your approach.

Question 19

Cascade Industries issued $800,000 of 6% bonds when the market interest rate was 7%. The bonds were issued at a discount of $45,000. If Cascade uses the straight-line method for amortization and the bonds have a 10-year term, what will be the carrying value of the bonds after the first year?

  1. $759,500, representing the original issue price plus one year of discount amortization
  2. $755,000, representing the face value minus the remaining unamortized discount balance
  3. $759,500, representing the face value minus the remaining unamortized discount balance (correct answer)
  4. $755,000, representing the original issue price plus one year of discount amortization
Explanation: Initial carrying value = $800,000 - $45,000 = $755,000. Annual discount amortization = $45,000 ÷ 10 years = $4,500. After one year, unamortized discount = $45,000 - $4,500 = $40,500. Carrying value = $800,000 - $40,500 = $759,500. This represents face value minus remaining unamortized discount. Choice A has correct amount but wrong description (not issue price plus amortization). Choice B has wrong amount. Choice D has wrong amount and description.

Question 20

Vertex Corp. issued $600,000 of 4% bonds at 92 on October 1, 2024. The bonds mature on October 1, 2029, and pay interest annually each September 30. What will be the effect on Vertex's debt-to-equity ratio immediately after the bond issuance, assuming Vertex had $400,000 in existing liabilities and $800,000 in stockholders' equity before the issuance?

  1. The ratio will increase from 0.50 to 1.19, because total liabilities increase by the full face value of the bonds
  2. The ratio will increase from 0.50 to 1.15, because total liabilities increase by the cash proceeds from the bond issuance
  3. The ratio will increase from 0.50 to 1.19, because the carrying value of the bond liability equals face value minus discount (correct answer)
  4. The ratio will increase from 0.50 to 1.10, because the discount reduces the liability reported on the balance sheet
Explanation: Initial debt-to-equity = $400,000 ÷ $800,000 = 0.50. The bond liability is reported at carrying value = face value minus discount. Face value = $600,000; cash received = $600,000 × 0.92 = $552,000; discount = $48,000. Carrying value = $600,000 - $48,000 = $552,000. New liabilities = $400,000 + $552,000 = $952,000. New ratio = $952,000 ÷ $800,000 = 1.19. Choice A has correct ratio but wrong reasoning (not full face value). Choice B shows wrong calculation. Choice D shows wrong ratio with incorrect reasoning about discount effect.