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Aznanalyst83
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Posted: 15 Feb 2011 at 12:04 \| IP Logged

Hey all:

I know this sounds really, really stupid,

Anyway, here is something that hit me but I couldn't answer.

A $1,000 bond that is issued FOR 9 MONTHS to maturity at 960 (or some number) had a 10% interest and 12% yield.

What is its interest expense.

All the Wiley exam prep material had 2-4 to 6 years annual or semi-annual interest, but nothing mention LESS than a year.

anyone got any ideas?

Do I get the whole interest rate for one year (say 100) or a fraction of that? (say 100/12*9)

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YoungRamsis
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Posted: 15 Feb 2011 at 19:35 \| IP Logged

interest expense is $960 x 12% x 9/12

keep in mind the expense is carrying value x effective (yield) rate
while interest payable is the face value x face rate, in this case $1000 x 10% x 9/12

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TaxProfMom
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Posted: 15 Feb 2011 at 21:46 \| IP Logged

Interest rates are always annualized unless otherwise noted. Think of it this
way - if the bond were a 2 yr bond, you'd pay 12% each year. Principal * rate
* term. But since it's a partial year, you'll only pay for the portion you owe
the money.

Good luck!

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