Simply purchases a $200,000 face value bond which matures in two years. The coupon rate is 6% and the market rate is 5%. How much premium or discount will be amortized in the first year, if any?
A)$1,814.05
B)$3,718.92
C)$10,000.00
D)$12,000.00

Question

Quizplus · Accepted Answer

The bond is issued at a premium since the coupon rate is higher than the market rate. The premium paid is calculated by subtracting the present value of the bond's cash flows from its face value. Using a financial calculator or spreadsheet, the present value of the cash flows is $213,695.95. The premium paid is then $13,695.95. In the first year, the premium amortized will be $13,695.95/2 = $6,847.98. The interest payment for the first year is $200,000 x 6% = $12,000. Therefore, the amortized premium will be subtracted from the interest payment to get the net interest expense, which is $12,000 - $6,847.98 = $5,152.02. Thus, $1,814.05 will be amortized in the first year.

Simply Purchases a $200,000 Face Value Bond Which Matures in Two