Jackson purchased a 6 percent XYZ corporate bond at 70 with 5 years to maturity. 4 years later, Jackson sold the bond at 95. What is the gain or loss?

Explanations

The bond was purchased at $700 (70% of $1,000 par) and matures at $1,000 par in 5 years. To solve, take the $300 difference and divide it by the 5 years to maturity. $300 divided by 5 Years = $60. This is the per year accretion. Next add the TOTAL accretion to the purchase price of the bond. $60 per year x 5 years = $300 total accretion. Then, you add the total accretion to the purchase price of the bond. This is the Adj. Cost Basis. $700 original cost + $300 total accretion = $1,000 (adjusted cost basis). Finally, compare this number to the selling price to get the gain or loss. $1,000 (adj. cost basis) - $950 selling price = $50 capital loss