Question

2. The following shows the information of a government bond traded in the secondary market.

Type of Bond Government bond

Issue Date May 16, 2006

Maturity Date May 16, 2016

Face Value $100

Redemption Value $108

Coupon Rate 5% payable semiannually

Yield Rate 8% convertible semiannually

Construct the bond amortization schedule for year 5 and year 6 (i.e., for the 9th coupon through the 12th coupon).

Answer 1

We need to calculate the purchase price to amortise the bond at at the effective yield

Purchase price=PV of the semi-annual coupons + PV of redemption value

both discounted at the semi-annual yield

Ie. Price=(Pmt.*(1-(1+r)^-n)/r)+(RV/(1+r)^n)

where, Price paid needs to be found out--??

pmt. =the semi-annual coupon= 100*5%/2= $ 2.5

r= semi-annual yield= 8%/2= 4% 0r 0.04

n= no.of semi-annual periods= 10 yrs.*2= 20 periods

RV= redemption value= $ 108

So, applying the formula,

Price of the bond =(2.5*(1-(1+0.04)^-20)/0.04)+(108/(1+0.04)^20)

83.27

So, it is a discount bond.100-83.27= 16.73 is the discount to be amortised.

Now , drawing the amortisation table

	1	2=2.5%*FV	3=Yd.4%*Prev. BV in 7	4=3-2	5	6	7=6-5
Date	Semi-annual coupon period	Semi-annual Coupon int.	Int. exp.	Amortsn. Of bond discount	Dr. bal in Bond disc.	Credit bal.in Bondspayable	BV of bond payable
May 16,2016	0				16.73	100	83.27
Nov 16,2016	1	2.5	3.33	0.83	15.90	100.00	84.10
May 16,2017	2	2.5	3.36	0.86	15.04	100.00	84.96
Nov 16,2017	3	2.5	3.40	0.90	14.14	100.00	85.86
May 16,2018	4	2.5	3.43	0.93	13.20	100.00	86.80
Nov 16,2018	5	2.5	3.47	0.97	12.23	100.00	87.77
May 16,2019	6	2.5	3.51	1.01	11.22	100.00	88.78
Nov 16,2019	7	2.5	3.55	1.05	10.17	100.00	89.83
May 16,2020	8	2.5	3.59	1.09	9.07	100.00	90.93
Nov 16,2020	9	2.5	3.64	1.14	7.94	100.00	92.06
May 16,2021	10	2.5	3.68	1.18	6.76	100.00	93.24
Nov 16,2021	11	2.5	3.73	1.23	5.53	100.00	94.47
May 16,2022	12	2.5	3.78	1.28	4.25	100.00	95.75
Nov 16,2022	13	2.5	3.83	1.33	2.92	100.00	97.08
May 16,2023	14	2.5	3.88	1.38	1.53	100.00	98.47
Nov 16,2023	15	2.5	3.94	1.44	0.09	100.00	99.91
May 16,2024	16	2.5	4.00	1.50	-1.40	100.00	101.40
Nov 16,2024	17	2.5	4.06	1.56	-2.96	100.00	102.96
May 16,2025	18	2.5	4.12	1.62	-4.58	100.00	104.58
Nov 16,2025	19	2.5	4.18	1.68	-6.26	100.00	106.26
May 16,2026	20	2.5	4.25	1.75	-8.01	100.00	108.01
		50	74.74	24.74