At the beginning of his current tax year, Eric bought a corporate bond with a ma

Question

At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $34,000 from the secondary market for $26,200. The bond has a stated annual interest rate of 5 percent payable on June 30 and December 31, and it matures in five years on December 31 Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures? Interest income reported this year Interest income reported in the year the bond matures

Explanation / Answer

Answer:

Interest Income reported this year = $34,000 * 2.5% Semi annually * 2
Interest Income reported this year = $1,700

Interest Income reported in the year the bond matures = Interest Income + Interest income related to Market Discount

Interest Income = $34,000 * 2.5% Semi annually * 2 = $1,700
Market Discount = $34,000 - $26,200
Market Discount = $7,800

Interest Income reported in the year the bond matures = $1,700 + $7,800
Interest Income reported in the year the bond matures = $9,500

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