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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.)

Respuesta :

Answer: $8

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)

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