Alpha company purchased a bond investment on January 1, 2017. The bonds have a p
ID: 2558606 • Letter: A
Question
Alpha company purchased a bond investment on January 1, 2017. The bonds have a par of $10,000, pay interest at a 4% annual rate and have years until maturity. What is the total Interest Income that will be reported over the life of the bond investment if the bonds were purchased at 95 and Alpha uses the straight line amortization method? Alpha company purchased a bond investment on January 1, 2017. The bonds have a par of $10,000, pay interest at a 5% annual rate and have 5 years until maturity. What is the total Interest Income that will be reported over the life of the bond investment if the bonds were purchased at 103 and Alpha uses the straight line amortization method?Explanation / Answer
Solution:
Question 1
Total bond interest income over life of bonds
Amount receipts
5
Payments of
$400
(Par Value 10,000*Stated Interest Rate 4%)
$2,000
Par Value at Maturity
$10,000
Total receipts
$12,000
Less: Purchase Cost of Bond Investment (10,000*95%)
$9,500
Total bond Interest Income
$2,500
Problem 2
Total bond interest income over life of bonds
Amount receipts
5
Payments of
$400
$2,000
Par Value at Maturity
$10,000
Total receipts
$12,000
Less: Purchase Cost of Bond Investment (10,000*103%)
$10,300
Total bond interest income
$1,700
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Total bond interest income over life of bonds
Amount receipts
5
Payments of
$400
(Par Value 10,000*Stated Interest Rate 4%)
$2,000
Par Value at Maturity
$10,000
Total receipts
$12,000
Less: Purchase Cost of Bond Investment (10,000*95%)
$9,500
Total bond Interest Income
$2,500
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