Question

Book value of a bond (principal + interest payable) at the beginning of the year = $100 Market value of the bond (principal + interest payable) at the beginning of the year = $120 Discount rate prevailing when the bond was issued = 10% Discount rate prevailing at the beginning of the year = 8% Payments to bondholders during the year = $7 The bond was bought back for $95 at the end of the year. Gain (or loss) on bond buyback =? (Put a minus sign in front of a loss.)

Answer 1

Answer: $8

Step-by-step explanation:

Given that,

Book value of a bond = $100

Market value of the bond (principal + interest payable) = $120

Discount rate when bond was issued = 10%

Discount rate prevailing at the beginning of the year = 8%

Therefore, Discount amount = 0.08 × $120

= $9.6

Payments to bondholders = $7

The bond was bought back(Repurchase price) for $95 at the end of the year

Net worth at the end of 1 year = Market value - Discount amount - Payments to bondholders

= $ 120 - 9.6 - 7

= $103.4

Net gain / loss = Net worth at the end of 1 year - Repurchase price

= $103.4 - $95

= $8.4

= $8 (approx)