Bond :
Face Value = 100,000
State Rate = 9%
Semi-annual Payments
Term = 3years
Market Rate of 12%
Amortize the bond to determine:
Year 1 Interest Expense
End of Year 1 carrying value.
My Answers:
Year 1 Interest Expense = 5,621.05
End of Year 1 carrying value =94,805.14
Am I correct?
To determine the Year 1 Interest Expense and End of Year 1 carrying value, you need to apply the amortization calculations to the bond.
First, let's calculate the semi-annual coupon payment:
Coupon Payment = Face Value × State Rate / Semi-annual Payments
Coupon Payment = $100,000 × 9% / 2
Coupon Payment = $4,500
Next, let's calculate the total number of semi-annual periods in the bond term:
Total Semi-annual Periods = Term × Semi-annual Payments
Total Semi-annual Periods = 3 years × 2
Total Semi-annual Periods = 6 periods
Now, we can calculate the semi-annual interest rate using the market rate:
Semi-annual Interest Rate = Market Rate / Semi-annual Payments
Semi-annual Interest Rate = 12% / 2
Semi-annual Interest Rate = 6%
To determine the Year 1 Interest Expense, we need to calculate the interest for the first period:
Year 1 Interest Expense = Carrying Value at the beginning of Year 1 × Semi-annual Interest Rate
Year 1 Interest Expense = $100,000 × 6% = $6,000
Next, we can calculate the Carrying Value at the end of Year 1. Since we have semi-annual payments and interest payments, it requires the use of the amortization formula:
Carrying Value at the end of Year 1 = Carrying Value at the beginning of Year 1 + Coupon Payment - Year 1 Interest Expense
Using the formula, we can calculate the End of Year 1 carrying value:
Carrying Value at the end of Year 1 = $100,000 + $4,500 - $6,000 = $98,500
Based on the calculations, the correct values would be:
Year 1 Interest Expense = $6,000
End of Year 1 carrying value = $98,500
Therefore, your answers are not correct.