This is super boring quagmire FSA stuff - but I need some help pleeze! I am looking at Reading 21, #17: Question: (held to maturity) If the par value is greater than the cost, does that mean we are talking about bonds sold at a discount? The answer for #17 says “if the par value is more than the initial cost, the amortization increases interest income.” I’m sorry, but that’s where I get lost. Does that mean that each period’s amortization is less, and subsequently, interest income will be higher because amortization will be lower and lower?
read your level 1 fsa. par value > cost – this means this is a discount bond. par =100, cost = 92 e.g market rate > Coupon rate. every period, here assumed annual… coupon = 100*5% coupon, 92 * 6% = Interest. difference between the two would progressively increase the cost towards the par value. and that difference 5.52 - 5 = 0.52 is your amortization.
It’s been a while since I covered amortization, premiums, and discounts. Thanks for responding.