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%). What amount will be reported for the long-term investment in bonds on the balance sheet on December 31, 2020?

Question

Quizplus · Accepted Answer

The amount reported for the long-term investment in bonds on the balance sheet on December 31, 2020, would be $96,172. This is because the initial investment of $95,735 will accrue interest at the effective interest rate of 6% over the six months until December 31, 2020. The interest for six months would be calculated on the $95,735 at 6% per annum, which is approximately $2,872 for half a year (since 6% of $95,735 is approximately $5,744 for a full year). Adding this interest to the initial investment amount gives a new balance of approximately $96,172.

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