FRA PROBLEM

CFA Level II FRA
#1

Hello,

I wanted some help on figuring out what the curriculum is trying to explain with the answer for problem (EOC) #17, reading 16.

Why is it than when the par value of a Held to maturity security is < than the initial cost, the interest income is lower.

Interest income is dependent on the previous period amortized cost and effective rate, I don’t see the relationship.

I understand that interest received - interest income = amortization premium (if +), but how is the interest income affected when par value is less?

Thanks.

#2

this was shown to you in Level 1 - either in Fixed Income or in FRA.

(Under Amortization of Discount / Premiums).

#3

Amortization of discount will happen as par val is less and it is a + ve number

A=B+ (+ve) => B