Homework Answers
| Value of Bond at issue date=Present Value of Future Cash Flows | ||||||||||
| Rate | Effective Semi annual interest rate | 3% | (6/2) | |||||||
| Pmt | Semi annual interest payment | $20.00 | (1000*4%)/2 | |||||||
| Nper | Number of semi annual payments | 10 | (5*2) | |||||||
| Fv | Payment at maturity =Face Value | $1,000 | ||||||||
| PV | Value of Bond | $914.70 | (Using PV function of excel with Rate=3%,Nper=10,Pmt=-20,Fv=-1000) | |||||||
| 1) | Value of Bond at Issue Date | $914.70 | ||||||||
| 2) | At each interest payment date cash is decreased | ($20.00) | ||||||||
| Amount of discount | $85.30 | (1000-914.70) | ||||||||
| Discount amortization per period(Straight line) | $8.53 | (85.30/10) | ||||||||
| Interest Expense =Cash Payment +discount amortization | ||||||||||
| 3) | Interest expense at Second Interest payment date | $28.53 | (20+8.53) | |||||||
| 4) | Amortization of discount at third interest payment date | $85.30 | ||||||||
| 5) | Reacquisition price at date of call | $1,010 | (101%*1000) | |||||||
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