Question

Refer to the amortization tables in your slides. If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment is $50 (coupon rate is 5%, face value of bond is $1,000), and the annual market interest rate for the period is 6%, what is the amount of amortization and the ending balance of the bond

Answer 1

The correct answer is $3.12 and $888.42.

Step-by-step explanation:

According to the scenario, the given data are as follows:

Beginning balance = $885.30

cash payment = $50

Face value of bond = $1,000

Interest rate = 6%

We can calculate the amortization amount by using following formula:

Amortization amount = Interest expense - cash payment

Where, Interest expense = Beginning balance × interest rate

= 885.30 x 6%

= $53.12

By putting the value, we get

Amortization amount = 53.12 - 50

= $3.12

And, Ending balance of bond = Beginning balance of bond + Amortization amount

= 855.30 + 3.12

= $888.42