Analyze and report investments in held-to-maturity securities
Response to the following problem:
South Mark (SM) owns vast amounts of corporate bonds. Suppose that on June 30, 2014, SM buys $950,000 of CitiSide bonds at a price of 102. The CitiSide bonds pay cash interest at the annual rate of 7% and mature at the end of five years.
1. How much did SM pay to purchase the bond investment? How much will SM collect when the bond investment matures?
2. How much cash interest will SM receive each year from CitiSide?
3. Will SM's annual interest revenue on the bond investment be more or less than the amount of cash interest received each year? Give your reason.
4. Compute SM's annual interest revenue on this bond investment. Use the straight-line method to amortize the premium on the investment.