Question

On January 1, 2018, an investor paid $303,000 for bonds with a face amount of $330,000. The stated rate of interest is 11% while the current market rate of interest is 13%. Using the effective interest method, how much interest income is recognized by the investor in 2018 (assume annual interest payments and amortization)

Answer 1

$39,791.7

Step-by-step explanation:

Calculation of how much interest income is recognized by the investor in 2017

Using this formula

Interest income=Bonds amount+(Bonds amount *Current market rate of interest)-(Face amount*Contract rate of interest)*Current market rate of interest

Let plug in the formula

Interest amount=$303,000+($303,000*13%)-($330,000*11%)*13%

Interest amount=$303,000+($39,390)-($36,300)*13%

Interest amount=($342,390-$36,300)*13%

Interest amount =$306,090*13%

Interest amount =$39,791.7

Therefore the amount of interest income recognized by the investor in 2017 will be $39,791.7