Question

The Suede Company acquired a $2 million face value bond that has an 8% coupon rate​ (pays interest annually on December​ 31) on January​ 1, 2017. The bond matures on December 31, 2022. On January​ 1, 2017​, the market yield for bonds of equivalent risk and maturity was 6%

Required

a.	How much did SuedeSuede pay for this bond on January​ 1, 20172017​?
b.	On December​ 31, 20172017​, the market yield for bonds of equivalent risk and maturity is 77​%. What would be the market value of this bond on December​ 31, immediately after the coupon payment on that​ date?
c.	On December​ 31, 20182018​, the market yield for bonds of equivalent risk and maturity is 8 %8%. What would be the market value of this bond on December​ 31, immediately after the coupon payment on that​ date?
d.	Assume each of three​ scenarios: the bond is to be​ (i) amortized​ cost, (ii)​ FVOCI, or​ (iii) FVPL: times• How much would the balance sheet value of this bond be on December​ 31, 20172017​, and December​ 31, 20182018​? times• How much income would be reported in 20172017 and 20182018 for this​ bond?   times• How much would OCI and accumulated OCI be for fiscal years 20172017 and 20182018​?

Answer 1

a.Amount paid for the bond by Suede Company on Jan 1, 2017

is the present value of all its future coupon cash flows PLUS PV of Face Value to be received at maturity

both discounted at the market interest rate

using the formula to find PV/Price of the bond,

PV/Price= $ Coupon Pmt.*(1-(1+Mkt. yield)^-n)/Mkt.yield)+(Face value/(1+Mkt.yield)^n)

where, n= no.of yrs. Still pending To maturiy

so, price=((2000000*8%)*(1-1.06^-6)/0.06)+(2000000/1.06^6)=

2196693

bValue of the bond immediately after coupon pmt. On Dec 31, 2017

that is, now no.of periods pending to maturity , n will become 5

& the mkt. yield = 7%

So, using the above formula,

so, price=((2000000*8%)*(1-1.07^-5)/0.07)+(2000000/1.07^5)=

2082004

c.Value of the bond immediately after coupon pmt. On Dec 31, 2018

that is, now no.of periods pending to maturity , n will become 4

& the mkt. yield = 8%

So, using the above formula,

so, price=((2000000*8%)*(1-1.08^-4)/0.08)+(2000000/1.08^4)=

2000000

Amortisation Table
Year	Interest Recd.	Interest income	Premium amortised	Premium to be amortised	Face value	Book /Carrying value
1	2=FV*8%	3=Prev.BV in 7*6%	4=Prev.5-4	5	6	7
0				196693	2000000	2196693
1	160000	131802	-28198	168495	2000000	2168495
2	160000	130110	-29890	138604	2000000	2138604
3	160000	128316	-31684	106921	2000000	2106921
4	160000	126415	-33585	73336	2000000	2073336
5	160000	124400	-35600	37736	2000000	2037736
6	160000	122264	-37736	0	2000000	2000000
Total	960000	763307	-196693

d.---i. Amortised cost
Balance sheet value
31-Dec-17	2168495	as in amortisation table
31-Dec-18	2138604	as in amortisation table
Income reported
2017	130110	as in Amort. Table
2018	128316	as in Amort. Table
OCI & acumulated OCI
2017	0	Not applicable
2018	0	Not applicable

ii. FVOCI---- AFS sec.
Balance sheet value
31-Dec-17	2082004
31-Dec-18	2000000
Income reported--(face value*Nom..interest rate)
2017	2000000*8%=	160000
2018	2000000*8%=	160000
OCI & acumulated OCI
	OCI		AOCI
2017	2082004-2196693=	-114689	-114689
2018	2000000-2082004=	-82004	-196693

iii.FVPL----Trading sec.
Balance sheet value
31-Dec-17	2082004
31-Dec-18	2000000
Income reported--(Face value*Noml..interest rate)
2017	2000000*8%=	160000
2018	2000000*8%=	160000
OCI & acumulated OCI
2017	0	Not applicable
2018	0	Not applicable