Suppose an investor purchases $100,000 of 5% Government of Canada bonds at a price of $95,735 on June 1, 2020. The bonds pay interest on June 1 and December 1. The investor intends to hold the bonds until their maturity on June 2, 2025. The bonds will be outstanding for five years (10 interest periods). The investor paid a discounted price for the bonds of $95,735 (an effective interest rate of 6%). How much total interest revenue will be recorded on December 1, 2020?
A) $2,500
B) $2,917
C) $2,872
D) $3,354

Question

Quizplus · Accepted Answer

The total interest revenue recorded on December 1, 2020, includes the cash interest received and the amortization of the discount. The cash interest is $2,500 (5% of $100,000 for half a year), and the amortization of the discount is calculated using the effective interest rate method. The effective interest for the first period is $95,735 * 6% / 2 = $2,872. Therefore, the total interest revenue is $2,872.

Suppose an Investor Purchases $100,000 of 5% Government of Canada