simple question- FRA investment, question, increase, interest, simple

bcp901

im forgetting this from L1
investments in financial assets
why would interest income increase when the par value is more than historical cost for investment in debt securities?

spartanag07

thanks sumz… always get confused….
And I think I have messed up in relation to the directional stuff as well.
right, what I have written in terms of the interest rates is related to a premium bond.
In a discount bond - YTM would be 7%, Coupon 6%, e.g.
PAR * Coupon = 1000 * 6% = 60
Face * Coupon = 900 * 7% = 63
And 3$ would be the Bond Discount Amortization. (which gets added to Interest income).
For a premium Bond:
Face=1100, Par=1000
YTM=5%, Coupon=6%
Par * Coupon= 60
Face* YTM=55
Subtract 5$ as Bond Premium Amortization (reduces Interest Income).

zbird2134

so the amortization of a discount bond gets added to the interest income under the effective interest method?
so how about the premium bond? it reduces the interest income and thus the net income?
by the way for discount bond: YTM is greater than coupon rate.

economicz

par  Historical Cost of investment
1000  900
So am I right in saying it is a discount Bond.
This means YTM
YTM=5%, Coupon=6%
Par * Coupon = 60 (1000 * .06)
Face * YTM = 900 * .05 = 45
Amortization of Bond Discount = 60 - 45 = 15 Next Period Investment Cost = 900 + 25 = 915

maratikus

im referring to Reading 21; Q17