Grant paid a premium for a corporate bond when he purchased it for $26,402 on the secondary market. The bond, which matures in ten years, has a par value of $25,000. If Grant does NOT elect to amortize the cost of the premium each year, how should the premium be reported on his tax return?

1. For each year he owns the bond, a $140.20 adjustment to interest should be reported.

2. Upon maturity, $1,402 in taxable interest should be reported.

3. Upon maturity, a $1,402 capital gain should be reported.

4. Upon maturity, a $1,402 capital loss should be reported.