Final answer:
The correct answer to the question is False since Tom's total interest income should be $600, not just the $500 collected in December. Additionally, due to the increase in market interest rates from 6% to 9%, Tom would expect to pay less than $10,000 for a bond offering 6% interest to match the current market yield.
Step-by-step explanation:
The student's question involves the calculation of interest income for a cash basis taxpayer. To answer the question: A. True or B. False, regarding Tom's interest income from the bond for the year being $500, we must understand that with the purchase of the bond, Tom also paid $100 of accrued interest. Therefore, when he collects $500 interest in December, this is not the sole amount of interest income for the year. The total interest income should include the additional $100 of accrued interest paid at the time of purchase and then received as part of the December interest payment, resulting in total interest income of $600 for the year.
To address the other part of the question related to the principle of bond pricing, when the market interest rates rise, the price of existing bonds that offer lower interest rates typically falls. Therefore, if the market rate is 9% but the bond's rate is 6%, an investor would expect to pay less than the bond's face value of $10,000 to achieve a competitive yield.