Question

On Jan 1, ABC issues a bond with a face value of 1,000, 6% coupon, 3 year term, payble semi-annually each July 1 and Jan 1. The market requires a 4% return. What is the net book value of the bond reported on the balance sheet at the end of the first year

Answer 1

1038.07

Step-by-step explanation:

We need to first of all determine the price at which the bond was issued, which can be done using a financial calculator bearing in mind that the financial calculator would be set to its default end mode before making the following inputs:

N=6(number of semiannual coupons in 3 years=3*2=6)

PMT=30(semiannual coupon=face value*coupon rate/2=1000*6%/2=30)

I/Y=2(semiannual yield=4%/2=2%)

FV=1000(the bond face value is 1000)

CPT

PV=1056.01

Interest expense for June 30=1056.01*2%=21.12

coupon for June=1000*3%=30

balance as at 30 June=beginning balance+interest expense-coupon

balance as at 30 June=1056.01+21.12-30

balance as at 30 June= 1,047.13

interst expense at 31 December=1,047.13 *2%=20.94

coupon for 31 December=1000*3%=30

balance as of 31 Decemer(end of first year)= 1,047.13+20.94-30

balance as of 31 Decemer(end of first year)=1038.07