If interest is paid annually the YTM is 4.48% and if interest is paid semi annually YTM is 2.24%. YTM means Yield to maturity that is paid on bonds ,to determine YTM we first calculate interest on the bonds which is explained below. Formula for YTM is given in the attachment.
Interest is paid annually
Annual Interest = 1000*5.4% = 54
YTM = [54 +(1000 - 1087)/12] /(1000+1087)/2 = 46.75 /1043.5
YTM = 4.480%
Interest paid semi annually
Interest = 1000*5.4% = 54/2 = 27
YTM = [27 + (1000 -1087)/24] / (1000+1087)/2 = 23.375/1043.5
YTM = 2.240%
In the above equation, time period is 24(12*2) because time period is semi annual.
A fixed-rate investment, such as a bond, has a speculative rate of return or interest known as yield to maturity (YTM), also known as redemption or book yield. The YTM is predicated on the idea or understanding that an investor buys the security at the current market price and retains it until it matures (reaches its full value), as well as the assumption that all interest and coupon payments are made on schedule.
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Answer:
Cash interest paid to the bondholders in 2016 is $9,000
Explanation:
The cash interest paid on the bond can be ascertained using the below coupon amount formula:
cash interest=face value*coupon rate
face value of the bond is $100,000
coupon rate is 9%
cash interest=$100,000*9%=$9,000
The cash account would be credited while interest expense is debited with $9000 plus amortization of premium on bonds