Return to exercise SB-7, the Prudential Bache (PB) investment in CitiCorp bonds. Journalize the following on PB's books:

a. Purchase of the bond investment on January 2, 2020. PB expects to hold the investment to maturity:

b. Receipt of annual cash interest on December 31, 2020

c. Amortization of the bonds on December 31, 2020

d. Collection of the investment's face value at the maturity date on January 2, 2025. (Assume the receipt of 2024 interest and the amortization of bonds for 2024 have already been recorded, so ignore these entries.)

Exercise B-7

Suppose Prudential Bache (PB) buys \(\$ 1,000,000\) of CitiCorp bonds at a price of 101 . The CitiCorp bonds pay cash interest at the annual rate of \(7 \%\) and mature at the end of five years.

1. How much did PB pay to purchase the bond investment? How much will PB collect when the bond investment matures?

2. How much cash interest will PB receive each year from CitiCorp?

3. Will PB'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 PB's first-year interest revenue on this bond investment. Use the effective interest of \(6.75 \%\) to amortize the investment.