Question

On January 1 of this year, Houston Company issued a bond with a face value of $10,000 and a coupon rate of 5 percent. The bond matures in three years and pays interest every December 31. When the bond was issued, the annual market rate of interest was 4 percent. Houston uses the effective-interest amortization method. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)   

Required:

1. Complete a bond amortization schedule for all three years of the bond's life. (Enter all values as positive values.)   

Answer 1

Step 1 Calculation of issue price of bond Step 2: Amortisation Schedule Face Value Stated Rate $10,000 The effective interest rate is also called as market rate. It is the investor's yield maturity. When the effective interest rate is higher/Lower as compared bond coupon rate then, the bonds were issued at a discount/premium. The Discount/Premium is then amortised over the period of bond by using effective interest rate method. Under this method, 5.00% Annually Coupon Payment Market Rate 4.00% interest expense is derived by multiplying the bond carrying value with the effective interest rate applicable when the Maturity Period bonds were issued. The difference between the interest expense and actual interest paid is the discount/premium which will be amortised. Amortisation schedule (Effective Interest Method) Opening book Coupon payment frequency Coupon Rate consider for calculation Amortisation of Closing Book Cash Payment Interest Expense Date 5.00% Balance Bond Premium Value (D) (B)-(C) (A)+(C)-(B) $10,278 $10,189 (A) (B) (C) (A) x 4% Jan 01, Year 1 Coupon Payment $500 Dec 31, Year 1 [$10000 x 5%] 4.00% $10,278 $500 $411 $89 Market Rate Consider for Calculation Dec 31, Year 2 Dec 31, Year 3 $10,189 $500 $408 $92 $10,097 $10,097 $500 $403 $97 $10,000 Period 3 Present Value of Coupon Payments Present Value of Annuity of $1 Present Value of Coupon Payments (A) 2.77509 $1,388 [$500 x 2.77509] Present Value of Maturity Value Present Value of $1 Present Value of Maturity Value (B) 0.88900 $8,890 [$10000 x 0.889] Present Value of Bond Present Value of Coupon Payment + Present Value of Maturity Present Value of Bond [(A)(B)] $10,278 Issue price of the Bond $10,278