Question

e Left:2:27:59 Rishabh Setty: Attempt 1 Question 4 (1 point) A 12-year, $100 par value bond with 10% annual coupons (with respect to the par value), payable semiannually, is redeemable for $120. The annual effective yield on the bond is 6% Calculate the amount of premium amortized in the 5th coupon payment. O a) 1.55 Ob) 0.69 Oc) 0.87 Od) 1.38 O e) 0.81

Answer 1

Answer: A)1.55

Redemption Value = $120 , At the time of redemption the bond yield 6%

Thus, effective interest for the first sixmonth is $120*6%*6/12=$3.6. Of this amount , $5 (Face Value*Cupon rate*6/12 .ie 100*10%*6/12) is paid in cash and $1.4 ($5.00-$3.6) ispremium amortization. The premium amortization reduces thenet book value of the debt to $119 ($120.00-$1.4 , Round off ). This new balance would then be usedto calculate the effective interest for the next period. This process would be repeated each period , as shown below:

($)

Period	Beggining of Period Net Book Value of Bonds Payable	Interest Expense (Net Book value*6%*6/12)	Amount of Payment	PremiumAmortization (Payment- Interest Expense)	End of period Net Book Value(Beggining balance- Amortization) (Rounded Figure)
1	120	3.6	5	1.4	119
2	119	3.57	5	1.43	118
3	118	3.54	5	1.46	117
4	117	3.51	5	1.49	115
5	115	3.45	5	1.55	113