Credit Crunchers Ltd. has a large investment in corporate bonds. Suppose Credit Crunchers Ltd. buys $6,000,000 of Government of Alberta bonds at a price of 98. The Government of
Alberta bonds pay cash interest at the annual rate of 3.0 percent and mature in 10 years. Credit Crunchers Ltd. plans to hold the bonds until maturity.
1. How much did Credit Crunchers Ltd. pay to purchase the bond investment? How much will Credit Crunchers Ltd. collect when the bond investment matures?
2. How much cash interest will Credit Crunchers Ltd. receive each year from the Government of Alberta?
3. Will Credit Crunchers Ltd.'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 Credit Crunchers Ltd.'s annual interest on this bond investment. Use the straight-line method to amortize the discount on the investment.