Question

At the beginning of his current tax year, David invests $11,700 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $560 in interest ($280 every six months) from the Treasury bonds during the current year, and the yield to maturity on the bonds is 3.6 percent. (Round your intermediate calculations to the nearest whole dollar amount.)

Answer 1

Answer: $419.96

Step-by-step explanation:

Question is:

How much interest income will he report this year if he elects to amortize the bond premium?

The interest for the first period will be:

= Bond price * yield * 6/12 months

= 11,700 * 3.6% * 0.5

= $211

Bond premium amortization:

= Interest received - Interest

= 280 - 211

= $69

Bond value in second half of year:

= Bond value - Bond premium amortization:

= 11,700 - 69

= $11,631

Interest for second period:

= 11,631 * 3.6% * 0.5

= $209.36

Total interest = 210.60 + 209.35

= $419.96