Question

On January 1, 2009, S Company purchased 100, 10-year, $1,000 bonds paying 8% interest when comparable bonds were paying 10%. Interest payments are received every June 30^thand December 31^st.  What is the net book value of the bonds on December 31, 2009? please show work

Answer 1

THe net Book Value of the Bond can be computed as the PV of the Bon using the following formula:

interest payment X (1- (1+r/m)^-nXm)/(r/m) + Bond Value X(1+r/2)^-2n

interest payment = 8%/2 X 1000 = 40

r = discount rate = 10%

n = number of years = 10

m = number of periods per year = 2 (semi-annual)

Hence the PV of the bond is 40 X (1-(105%)^-20)/5% + 1000X(105%)^-20 = 875.38

This will be amortized as following:

		4% X 1000	Opening Balance X 10%/2	Opening Bal. + (Amortization - Interest Payment)
	Opening Balance	Interest Payment	Amortization	Bond Repayment
Jul-09	? 875.38	40	? 43.77	? 879.15
Dec-09	? 879.15	40	? 43.96	? 883.11
Jun-10	? 883.11	40	? 44.16	? 887.26

Hence the book value on 31 December 2009 will be $883.11