Question

Megan buys a bond that is redeemable for its par value of 20,000 after 5 years. The bond pays coupons of 800 annually. The bond is bought to yield 8% annually. Calculate the accumulation of discount (principal) in the 4th coupon.

NO EXCEL ! Only business calculator.

Answer 1

Yield (I/Y) = 8%

Number of periods (NPER) = 5 years

Par value of the bonds (FV) = 20,000

Coupon Payment (PMT) = 800

Required: accumulation of discount in 4^th coupon

The amount of discount in 4^th coupon would be equal to the difference between value of bond at the end of 3^rd coupon payment and value of bond at the end of 4^th coupon payment.

Value of bond at the end of 3^rd coupon payment can be calculated using financial calculator as below:

	Input	Output
I/Y	0.08
NPER	2
PMT	-800
FV	-20000
PV		18573.39

Value of bond at the end of 4^th coupon payment can be calculated using financial calculator as below:

	Input	Output
I/Y	0.08
NPER	1
PMT	-800
FV	-20000
PV		19259.26

Thus, amount of discount accumulated in 4^th coupon payment = 19,259.26 – 18,573.39 = 685.87.