Question

A 15-year $1000 bond with 6% annual coupons is bought at a premium to yield an annual effective rate of 4%. Calculate the amount for amortization of premium in the 7^th coupon.

Answer 1

According to formula,

Amortization at time n = FV* ( Coupon rate -Rate ) * (1/(1+rate))^(Duration of bond-n+1)

Amortization of interest at time 7 = $1000* (0.06 - 0.04 ) * (1/(1+ 0.04))^(15-7+1)

= $ 14.05173471

Payment = interest + Principal

Payment = 0.06*1000 =60

Amortization of premium or principal = $60 - $14.05173471 =$ 45.948265 Answer

Similarly, We can also solve above question using financial calculator :

N=15,

PMT = 60

I/Y =4%

FV= 1000

CPT PV After this

2nd PV

Set P1 =7 -> Scroll Down P2 =7 -> Scroll Down and look for interest

The answer will be $45.948265 Answer

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