Question

Bond contract rate = 7% semi-annual

Bond par                 = $10,000

Bond market rate   = 6% semi-annual

Bond life                   = 10 years

1. Calculate the discount/premium amortization per period (use the straight-line method)

Answer 1

Discount/premium amortization per period = $37.20 or $37

Discount/premium amortization per year will be $74.4 or 74

Working

We first need to calculate price of bond and then amortization per period.

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 10,000
Market Rate	6.00%	3.00%		Term (in years)	10
Coupon Rate	7.00%	3.50%		Total no. of interest payments	20

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Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$               10,000	at	3.00%	Interest rate for	20	term payments
PV of $1	0.55368
PV of	$               10,000	=	$ 10,000	x	0.55368	=	$ 5,537	A
Interest payable per term	at	3.50%	on	$ 10,000
Interest payable per term	$ 350
PVAF of 1$	for	3.00%	Interest rate for	20	term payments
PVAF of 1$	14.87747
PV of Interest payments	=	$ 350	x	14.87747	=		$ 5,207	B
				Bond Value (A+B)			$ 10,744

.

Bond issue price	$            10,744.00
Face value	$            10,000.00
Discount on bonds payable	$                (744.00)
Number of Interest payments (10 years x 2)	20
Discount/ premium to be amortized per Half year	$                  (37.20)

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