Fish Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. What is the premium or discount (rounded)?
A)$0
B)$1,808
C)$98,192
D)$100,000

Question

Quizplus · Accepted Answer

The bond’s annual interest payment is $6,000 ($100,000 x 6%). Year one will produce an interest expense of ($6,000 ÷ 1.07), or $5,607.48. Year two’s interest expense will be the same amount. In addition, the company will also pay the bond’s par value ($100,000) at maturity. The present value of the bond’s future cash flows is $97,192.52, which results in a discount of $2,807.48. However, since the bond was purchased for $100,000, the company could realize a gain of $1,808 ($100,000 - $97,192.52) if they sold it today.

Fish Corp Purchases a $100,000 Face Value Bond Which Matures in in Two