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

noel

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?

thecfawannabe

im referring to Reading 21; Q17

cv4cfa

par > Historical Cost of investment
1000 > 900

So am I right in saying it is a discount Bond.
This means YTM < Coupon Rate on Bond.

YTM=5%, Coupon=6%

Par * Coupon = 60 (1000 * .06)
Face * YTM = 900 * .05 = 45

Amortization of Bond Discount = 60 - 45 = 15 <- gets added to Income statement.
Next Period Investment Cost = 900 + 25 = 915

CP

needhelp1700

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.