Question
In: Accounting
Calculate the balance of the premium account at the end of Year 1 - Quarter 4...
Calculate the balance of the premium account at the end of Year 1 - Quarter 4 using the following information:
$80,000 four-year note with 12% interest. The market rate is 11%. This note's payments are quarterly and interest also compounds quarterly.
Solutions
Expert Solution
Price of the note is:
| Particulars | Cash flow | Discount factor | Discounted cash flow |
| Interest payments-Annuity (2.75%,16 periods) | 2,400.0 | 12.8046 | 30,730.98 |
| Principle payments -Present value (2.75%,16 periods) | 80,000 | 0.6479 | 51,829.94 |
| Bond price | 82,560.91 | ||
| Face value | 80,000.00 | ||
| Premium/(Discount) | 2,560.91 | ||
| Interest amount: | |||
| Face value | 80,000 | ||
| Coupon/stated Rate of interest | 12.00% | ||
| Frequency of payment(once in) | 3 months | ||
| Interest amount | 80000*0.12*3/12= | 2400 | |
| Present value calculation: | |||
| yield to maturity/Effective rate | 11.00% | ||
| Effective interest per period(i) | 0.11*3/12= | 2.750% | |
| Number of periods: | |||
| Particulars | Amount | ||
| Number of interest payments in a year | 4 | ||
| Years to maturiy | 4.0 | ||
| Number of periods | 16 |
| Period | Beginning carrying value | Interest expense | Interest paid | Premium amortisation | Ending carrying value | Balance premium | |
| A | C= A* 2.75% | D | E=C-D | F=A+E | |||
| Year 1 | Q1 | 82,560.91 | 2,270.43 | 2,400.00 | 129.57 | 82,431.34 | 2,431.34 |
| Year 1 | Q2 | 82,431.34 | 2,266.86 | 2,400.00 | 133.14 | 82,298.20 | 2,298.20 |
| Year 1 | Q3 | 82,298.20 | 2,263.20 | 2,400.00 | 136.80 | 82,161.40 | 2,161.40 |
| Year 1 | Q4 | 82,161.40 | 2,259.44 | 2,400.00 | 140.56 | 82,020.84 | 2,020.84 |
Balance premium is 2020.84
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