Trent Corp. purchased $1,000,000 of bonds at 96 when the market yield was 8%. The bonds pay interest at the rate of 6%. Trent intends to hold these bonds to maturity and will not need to sell the bonds before that date. Which of the following statements is correct?

Question

Quizplus · Accepted Answer

Since the bonds were purchased at a discount, the book value of the bond investment will increase toward its maturity value. This is because the discount will be amortized over the life of the investment and added to the interest revenue, increasing the bond's book value. Option A is incorrect because the cash interest will be less than the interest revenue due to the discount. Option C is incorrect because the company intends to hold the bonds to maturity, so they will be classified as held-to-maturity. Option D is incorrect because unrealized gains or losses are only recognized for available-for-sale securities.