Question

A 1000 par value 5-year bond with an annual coupon rate of 8.0% compounded semiannually was bought to yield 7.5% convertible semiannually. The bond will redeem at par value at maturity Determine the amount of premium amortized in the 6th coupon payment? Hint: What is the principal adjustment in the 6th coupon period?
(a) 2.00
(b) 2.08
(c) 2.15
(d) 2.25
(e) 2.34

Answer 1

Answer:

(b) 2.08

Explanation:

Using caclulator and inputs as present:

n = 10

I/Y = 7.5/2

    =3.75

pmt = 40

FV = 1000

CPT PV = $1020.53

Now we shall create an amortization schedule:

Period  pmt   Interest   End balance Difference(Premium amortized)

1    $40.00   $38.27    $1,018.80         $1.73    

2    $40.00   $38.21    $1,017.01         $1.79    

3    $40.00   $38.14    $1,015.14         $1.86    

4    $40.00   $38.07    $1,013.21         $1.93    

5    $40.00   $38.00    $1,011.21         $2.00    

6    $40.00   $37.92    $1,009.13         $2.08    

Therefore, The amount of premium amortized in the 6th coupon payment is $2.08