While preparing for an upcoming exam, you are studying with some classmates when one of them asks the following:

“Am I correct that if bonds with a contract rate of 6% were issued to provide purchasers with a yield of 7%, then the bonds must have been issued at a discount? My understanding is that the interest expense on the bonds will be calculated using the face value of the bonds and the contract rate. I also think that because the bonds were issued at a discount, the company’s interest expense will be greater than the cash interest payment made to bondholders each period.”

Required

Evaluate your classmate’s response. Identify the elements that are correct and incorrect.