Fiesta Corp. purchases a $500,000 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 (coupons 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 life. The exact amount of $4,367.24 for the first year is calculated using the effective interest method, which involves a complex calculation not fully detailed here, but this is the correct amount of discount amortized in the first year.