A bond with a face value of $100,000 was issued for $93,500 on January 1 of this

Question

A bond with a face value of $100,000 was issued for $93,500 on January 1 of this year. The stated rate of interest was 8 percent and the market rate of interest was 10 percent when the bond was sold. Interest is paid annually. How much interest will be paid on December 31 of this year?

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I know the correct answer is $8,000 but when I first did the problem I got an answer of $9,350 using this calculation:

* Interest = 93,500 * 10% = $9,350

Basically, I thought when calculating interest you multiplied the market rate by the NBV at the time. I'm confused about why it's $8,000? What is the difference between the "interest payment" and the "interest expense"?

Explanation / Answer

Interest payment = Face amount of Bond x Coupon rate on the bond issued

Interest expense = Book value of bond x Market rate on similar bonds issued.

The difference between the bond interest payment and interest expense is the amount of premium/ discount amortization. Amount of premium amortized is subtracted to interest payment to get interest payment and amount of discount amortized is added to get interest expense.

Thus in this case interest payment = 100000*0.08 = 8000

And interst expense = 93500 * 0.1 = 9350

And the difference is amortization of discount = 1350 (9350-8000)

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