Question

On January 1, assume that ABX Company issues $1,000,000 of 6-year, 5% bonds, the yield to maturity is 4%, and the interest is payable annually on December 31. Find the interest expense in the third year

Answer 1

Calculation of price of $1,000,000 bond:
Interest = 1,000,000 * 5% = 50000 per year
Present value of Interest at 4% =
50000 * PVAF 4% 6 year = 50000 * 5.24213 = $262106.5
Present Value of princpal amount
$1,000,000 * PVF 4% 6 year = 1,000,000 * 0.79031= $790310

Price of bond = 790310 + 262106 = $1,052,416.5

Here is the amorization schedule:

Here Interest expense is calculated as: Present value of bond at the beginning of period *Effective interst rate for the period. There may be differene due to approximation in excel.
Interest expense in year 3 is $41451.75 or 41452.