Bonds sell at less than 100% if the market rate is greater than the stated rate at the time the bonds are issued.

Example:
On January 1, 2005 ABC issues $100,000 of 10%, 2 year bonds. The
bonds pay interest annually each December 31. The bonds are issued
at a price of 95. Assume straight-line amortization of the discount.

> Jan 1, 2005 - Date of Issuance

Debit Credit
------- --------
Cash (100,000 x 95%) 95,000
Discount on Bonds Payable 5,000
Bonds Payable 100,000

> Dec 31, 2005 - Interest Payment

Interest Expense 12,500
Discount on Bonds Payable 2,500
Cash 10,000

> Dec 31, 2006 - Interest Payment and Maturity of Bonds

Interest Expense 12,500
Discount on Bonds Payable 2,500
Cash 10,000

Bonds Payable 100,000
Cash 100,000

*There are no market interest rate, where is the interest expense come from? *