Question

A 1000 par value 5-year bond with an annual coupon rate of 8.0% compounded semiannually was bought to yield 7.5% convertible semiannually. The bond will redeem at par value at maturity Determine the amount of premium amortized in the 6th coupon payment? Hint: What is the principal adjustment in the 6th coupon period?

(a) 2.00
(b) 2.08
(c) 2.15
(d) 2.25
(e) 2.34

Answer 1

(b) 2.08

Step-by-step explanation:

Using caclulator and inputs as present:

n = 10

I/Y = 7.5/2

=3.75

pmt = 40

FV = 1000

CPT PV = $1020.53

Now we shall create an amortization schedule:

Period pmt Interest End balance Difference(Premium amortized)

1 $40.00 $38.27 $1,018.80 $1.73

2 $40.00 $38.21 $1,017.01 $1.79

3 $40.00 $38.14 $1,015.14 $1.86

4 $40.00 $38.07 $1,013.21 $1.93

5 $40.00 $38.00 $1,011.21 $2.00

6 $40.00 $37.92 $1,009.13 $2.08

Therefore, The amount of premium amortized in the 6th coupon payment is $2.08