Suppose $20,000 of 8% bonds were purchased on March 1,2017,for a purchase price of 90.The purchasing company,whose year end is December 31,expects to hold the bonds until their maturity date five years from the date of purchase.Interest on the bonds will be paid every March 1 and September 1 until maturity.Assuming the premium or discount is amortized every interest payment using straight-line amortization,how much interest revenue will be recorded by the investor on September 1,2017?

Question

Quizplus · Accepted Answer

The annual interest payment on $20,000 of 8% bonds is:
$20,000 x 8% = $1,600

The bonds were purchased at 90, which means the purchase price was:
$20,000 x 90% = $18,000

The premium on the bonds is the difference between the purchase price and the face value:
$20,000 - $18,000 = $2,000

Based on straight-line amortization, the premium will be amortized at a rate of $400 per semi-annual interest payment, calculated as follows:
$2,000 / 5 years = $400 per year
$400 / 2 interest payments per year = $200 per interest payment

Therefore, the interest revenue recorded by the investor on September 1, 2017, will be:
$1,600 x 90% + $200 = $1,000

Suppose $20,000 of 8% Bonds Were Purchased on March 1,2017,for