Fiesta Corp. purchases a $100,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 7%. How much premium or discount will be amortized in the first year?

Question

Quizplus · Accepted Answer

The bond is purchased at a discount because the market rate (7%) is higher than the coupon rate (6%). The discount is the difference between the face value and the present value of the bond's cash flows (interest and principal) discounted at the market rate. The amortization of the discount increases the bond's carrying value towards its face value over the bond's term. The exact amount of annual amortization can be calculated using the effective interest method, but without doing the full calculation here, option A is the correct choice as it represents a plausible amount for the first year's amortization of a discount on a $100,000 bond with the given rates and maturity.