Question

David purchased a $5,000 bond on the secondary market. He paid a $500 premium. What is David's basis?

A. $500
B. $4,500
C. $5,000
D. $5,500
E. Mark for follow up

Answer 1

David's basis on the $5,000 bond purchased is:

C. $5,000.

Step-by-step explanation:

a) Data and Analysis:

Cost of Investment in bond = $5,000

Premium paid = $500

b) David's basis on the bond is the quoted price of the bond, which is a security investment. It is on this basis price that future interest will be calculated. The additional $500 as premium he paid is just an additional cost which he incurred in exchange for his interest in the bond. It does not form part of the basis.