Question

A bond with a 5-year maturity has a face value of 1,000 and coupon of 8%. Its amortization schedule is 20% at the end of year 3 and 20% at the end of year 4. What is its total cash flow at the end of year 3?

Answer 1

Its total cash flow at the end of year 3 is:

$792.

Step-by-step explanation:

a) Data and Calculations:

Maturity of bond = 5 years

Face value = $1,000

Coupon rate = 8%

Amortization schedule for each year = 20% (100/5)

Bond’s Periodic Cash flows:

End of year 1 = $200 + $80 interest ($1,000 * 8%) = $280

End of year 2 = $200 + $64 interest ($800 * 8%) = $264

End of year 3 = $200 + $48 interest ($600 * 8%) = $248

Total cash flow at the end of year 3 = $792