Question

At the beginning of his current tax year David invests $12,000 in original issue U.S. Treasury bonds with a $10,000 face value that mature in exactly 10 years. David receives $700 in interest ($350 every six months) from the Treasury bonds during the current year and the yield to maturity on the bonds is 5 percent.

a. How much interest income will he report this year if he elects to amortize the bond premium?

b. How much interest will he report this year if he does not elect to amortize the bond premium?

Answer 1

(a)	Reported Interest income	=	$        599
	Workings:
	Period	Cash payment	Interest Received	Premium amortization	Reported Interest
		(a)	(b)	(c) = (b) - (d)	(d) = (a) X 5% X 6/12
	1	$       12,000	$        350	$                  50	$        300
	2	$       11,950	$        350	$                  51	$        299
	Total		$        700	$                101	$        599
(b)	Reported Interest income	=	$        700
	Workings:
	Period	Cash payment	Interest Received	Premium amortization	Reported Interest
	1	$       12,000	$        350	0	$        350
	2	$       12,000	$        350	0	$        350
	Total		$        700	0	$        700