An issuer of 2 years maturity bonds with a $100 face value providing a 4% coupon

Question

An issuer of 2 years maturity bonds with a $100 face value providing a 4% coupon rate paid every six months was issued with a discount of $2.

The payment of one coupon by the issuer combined with the amortization of the discount over the life of the bond results in

a decrease in retained profits by $3.5.

a decrease in retained profits by $1.5.

a decrease in retained profits by $4.5.

a decrease in retained profits by $2.5.

A.

a decrease in retained profits by $3.5.

B.

a decrease in retained profits by $1.5.

C.

a decrease in retained profits by $4.5.

D.

a decrease in retained profits by $2.5.

Explanation / Answer

Option C.a decrease in retained profits by $4.5

Face Value 100 Annual Coupon 4%of Coupon Rate =4%*100 4 $2 Discount is for 2 years ie. 4 half months So Discount every half month =2/4 0.5 Effect on Retained Earnings =4+.5 $ 4.50

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