4. (4pts) A $10,000 par value 10-year bond with 8% annual coupons is bought at a...

4. (4pts) A $10,000 par value 10-year bond with 8% annual coupons is bought at a premium to yield an annual effective rate of 6%. Calculate the interest earned and the amount of premium amortized in the 7th coupon payment. Also find the total interest earned in the 10 years. (Answers: $641.58, $158.42, $6527.98)

Solutions

Expert Solution

n = 10
I = 6%
Cashflows		Amount	PVF	Present Value
Annual Interest		800	7.36009	5888.072
Principal		10000	0.558395	5583.95
Price f Bonds				11472.02

Amort Chart:
Period	Cash Int	Int Exp	Premium	Unamortized	Carrying
			Amortized	Premium	Value
0				1472.02	11472.02
1	800.00	688.32	111.68	1360.34	11360.34
2	800.00	681.62	118.38	1241.96	11241.96
3	800.00	674.52	125.48	1116.48	11116.48
4	800.00	666.99	133.01	983.47	10983.47
5	800.00	659.01	140.99	842.47	10842.47
6	800.00	650.55	149.45	693.02	10693.02
7	800.00	641.58	158.42	534.60	10534.60
8	800.00	632.08	167.92	366.68	10366.68
9	800.00	622.00	178.00	188.68	10188.68
10	800.00	611.32	188.68	0.00	10000.00

Total Interest earned in Year-7			641.58
Premium Amortized in Year-7			158.42
Bonds Carrying Value in Year-7			10534.6

jeff jeffy answered 10 months ago

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