Investor pay $950 for a 5-yr, $1000 bond paying 9%. Is interest per year off of 950 or 1000?

CaptainForest

1,000 x 9% = $90

bhet

this for the amortization of the interst on discount.
i think it is $ 950 x 90% = N1 for the first year.
N1 x 9% = N2 for the xecond year
N2 x 9% = N3 for the 3rd.

interest exp would be:

1000 x 9%

since your title is effective interest rate, i assume that it is the amortization of discount.

your question aint that clear.

fbm

No, $950 would be purchase price of this bond. Interest payments made every period will be the 9% of 1,000- but the actual interest expense accrued will be based on the purchase price and the effective interest rate that the bond has been issued. Since it is priced lower than the face value of $1,000- you know it is sold at a discount, and the effective rate of interest is then higher than the given rate. The total discount is the difference in the face value and purchase price, and amortization, or accretion, will be based off of the effective rate of interest.

morgaine300

KJane, you've gotten 3 different answers here because you are not providing enough information for anyone to know exactly what it is that you need. The actual interest payments are based on $1000, because that's what the actual bond is. The $950 is the value in the market of the bond at the time it is purchased. But the bond itself is actually $1000 and therefore that is what the company is going to pay interest on.

If you're actually doing amortization of the bond, then you need to say so. Titling the subject effective interest rate doesn't mean much, since I see people title things all kinds of things not related to the question. So if you're amortizing using effective interest rate, you need to specifically say so, so that people know what you're actually doing.

Unclear questions lead to unclear or multiple guessing answers, or no answer at all.