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.