im forgetting this from L1 investments in financial assets why would interest income increase when the par value is more than historical cost for investment in debt securities?
im referring to Reading 21; Q17
par > Historical Cost of investment 1000 > 900 So am I right in saying it is a discount Bond. This means YTM < Coupon Rate on Bond. YTM=5%, Coupon=6% Par * Coupon = 60 (1000 * .06) Face * YTM = 900 * .05 = 45 Amortization of Bond Discount = 60 - 45 = 15
so the amortization of a discount bond gets added to the interest income under the effective interest method? so how about the premium bond? it reduces the interest income and thus the net income? by the way for discount bond: YTM is greater than coupon rate.
thanks sumz… always get confused… And I think I have messed up in relation to the directional stuff as well. right, what I have written in terms of the interest rates is related to a premium bond. In a discount bond - YTM would be 7%, Coupon 6%, e.g. PAR * Coupon = 1000 * 6% = 60 Face * Coupon = 900 * 7% = 63 And 3$ would be the Bond Discount Amortization. (which gets added to Interest income). For a premium Bond: Face=1100, Par=1000 YTM=5%, Coupon=6% Par * Coupon= 60 Face* YTM=55 Subtract 5$ as Bond Premium Amortization (reduces Interest Income).