A $1000 par value bond paying interest at j2=6% has book value $1100 on March 1, 2010, at a yield rate of j2=4

Finance Dec 24, 2020

A $1000 par value bond paying interest at j2=6% has book value $1100 on March 1, 2010, at a yield rate of j2=4.5%. Determine the amount of amortization of the premium on September 1, 2010, and the new book value on that date.

Expert Solution

Bond Par value =$1,000

Coupon rate =6% pa , semi annual compounding.

Semi annual coupon =3%

YTM =4.5% pa, semi annual compounding

Semi Annual Yield =2.25%

Coupoon is payable on March 1 & Sep 1.

Book Value on March 1 =$1,100

Interest expense to be accrued on Sep 1=1100*2.25%=$24.75

Semi Annual Coupon amount =$1000*3% =$30

So Premium Amortization on Sep 1,2010=$30-$24.75=$5.25

New Book Value of Bond on Sep 1,2010 =$1,100-$5.25=$1,094.75

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