FRA Question

From the CFAI accounting book, page 173 on intercorporate investments.

The question is on page 167, question 17: Confabulated reported interesti ncome would be lower if the cost was the same, but the par value of:

Answer: B Cathay was 37,000.

This answer matches the Cathay Corp (Held-to-maturty) MV as of 12/31/09. The cost of 40,000.

Answer: page 173

The difference between historical cost and par value must be amortized under the effect interest method. If the par value is less than the initial cost (stated interest rate is greater than the effective rate), the interest income would be lower than the interest received because of amoritzation of the premium.

Do you have a question about this?

yes, sorry, my quesiton is can you please explain?? i was way off and dont understand the answer… AT ALL!

You buy an asset with a notional of $37k and pay $40k for it. Therefore you have purchased at a premium. That premium will be amortized as a loss over time through interest expense, thereby lowering it.