Carrying Value of a Bond
A company issues bonds, the details for which are included in the table.
| | |
|----------------------|-------------|
| Face Value | USD 1,000 |
| Bonds Issues | 500 |
| Coupon Rate | 3.50% |
| Market Interest Rate | 3.17% |
| Term | 20 Years |
| Interest Payments | Semiannual |
| Issue Proceeds | USD 524,302 |
Using the effective interest rate method, the carrying value of the bonds immediately after the eighth year end semiannual interest payment will be _closest_ to:
Incorrect.
This is the carrying value if the straight-line method of amortization is used.
Correct.
An amortization table can be constructed as follows (in USD):
| Payment Number | Beginning Carrying Value | Interest Expense | Interest Payment | Premium Amortization | Ending Carrying Value |
|----------------|--------------------------|------------------|-------------------|----------------------|-----------------------|
| 1 | 524,302 | 8,310 | 8,750 | 440 | 523,862 |
| 2 | 523,862 | 8,303 | 8,750 | 447 | 523,415 |
| 3 | 523,415 | 8,296 | 8,750 | 454 | 522,962 |
| 4 | 522,962 | 8,289 | 8,750 | 461 | 522,500 |
| 5 | 522,500 | 8,282 | 8,750 | 468 | 522,032 |
| 6 | 522,032 | 8,274 | 8,750 | 476 | 521,556 |
| 7 | 521,556 | 8,267 | 8,750 | 483 | 521,073 |
| 8 | 521,073 | 8,259 | 8,750 | 491 | 520,582 |
| 9 | 520,582 | 8,251 | 8,750 | 499 | 520,083 |
| 10 | 520,083 | 8,243 | 8,750 | 507 | 519,577 |
| 11 | 519,577 | 8,235 | 8,750 | 515 | 519,062 |
| 12 | 519,062 | 8,227 | 8,750 | 523 | 518,539 |
| 13 | 518,539 | 8,219 | 8,750 | 531 | 518,008 |
| 14 | 518,008 | 8,210 | 8,750 | 540 | 517,468 |
| 15 | 517,468 | 8,202 | 8,750 | 548 | 516,920 |
| 16 | 516,920 | 8,193 | 8,750 | 557 | 516,363 |
However, it is simpler to use a financial calculator.
[[calc: 8 x 2 = n 3.17 / 2 = iy 524302 sign pv 500 * 1000 * 0.035 / 2 = pmt cpt fv , 8 enter 2 * n 3.17 enter 2 / i 524302 chs pv 500 enter 1000 * 0.035 * 2 / pmt fv]]
Incorrect.
This is the solution after eight semiannual periods, not eight years.
USD 514,581.
USD 516,363.
USD 520,582.
