Question

At the beginning of his current tax year, Eric bought a corporate bond with a maturity value of $25,000 from the secondary market for $17,800. The bond has a stated annual interest rate of 8 percent payable on June 30 and December 31, and it matures in five years on December 31. Absent any special tax elections, how much interest income will Eric report from the bond this year and in the year the bond matures

Answer 1

Answer: See explanation

Explanation:

Based on the information given in the question, the interest income reported this year will be:

= ($25000 × 8%/2) × 2

= $25000 × 0.04 × 2

= $2000

The interest income that will be reported in the year the bond matures will be:

= $2000 + ($25000 - $17800)

= $2000 + $7200

= $9200