I’m looking for a way to solve this problem in less than 2 minutes. Any of you, wizzards of BAII Plus , Professional, please advice: XYZ has issued its bonds at $9,200, with a 6% coupon paid semi-annually and a face value of $10,000, maturing in three years. Using the effective interest method, calculate the net book value of the bonds at the end of the second year. (a) 9200 (b) 9697 © 9708 (d) 10000
Answer is C. Use the AMORT function
Strange, can you run through what you used on TVM? This AMORT is still killing me. This looks easy.
Input all you need to calculate I/Y After you get I/Y hit 2ND AMORT, P1=1, P2=4
XYZ has issued its bonds at $9,200, with a 6% coupon paid semi-annually and a face value of $10,000, maturing in three years. Using the effective interest method, calculate the net book value of the bonds at the end of the second year. PV=9200, PMT=300, FV=10000 N=6 CPT I/Y Then 2nd AMORT P1=1 P2=4 (because semi annual payment) scroll and boom! 
Took about 60 seconds to get answer C. First solve for the YTM for the 3 year period. Then, using that YTM for a 1 year period, just solve for PV.
Ah, maybe if I calculated I/Y first before going to AMORT, it might have worked. And I need to remember year 2 would = P4…thanks! I am losing it.
Meaning once you get I/Y, just input 2 into N and CPT PV, right? mcf Wrote: ------------------------------------------------------- > Took about 60 seconds to get answer C. > > > First solve for the YTM for the 3 year period. > Then, using that YTM for a 1 year period, just > solve for PV.
exactamente
mcf Wrote: ------------------------------------------------------- > exactamente holy smoke, thanks guys!! I am using the HP12c. I did n= 6 FV = 10000 pmt = 300 PV = (9200) i = 4.55% then, after 2 years, 4 periods have elapsed, so I plug 2 = N and hit PV again and 9709. 2 right in a row! that never happens : )
I can’t follow this question. what do you mean by book value? Is the question asking how much interest has been paid for 2 years? or how much more to go?
Book value, in this case, can be thought of as the same as the prevailing market price for the bond at a given point in time. The ‘book value’ wording threw me, actually, when I first read the question. I actually see very few companies report their debt at fair market value – rather, the book value reported is usually simply the value at issuance. Sometimes you’ll get a reconciliation in the debt footnote between book and market value.
Also if the question asked, how much interest would hit CFO for the 2nd year, what would your answer be?
I’d say $600 – the coupon payment. The remaining portion of the change in bond value would be the flow through the CFF… the amortization of the bond discount.
okay, then how’d you compute the increase in CFF for second year? basically i want to know how the F to do this problem and every aspect of it.
First, along the life of a bond you deal with CFF only at issue and at maturity: at issue a CFF inflow, at maturity a CFF outflow. The bond is issued at a discount, and as such it has an understated CFF and an overstated CFO. By this, it is understood that the net CFF of the company is understated (because you receive a smaller amount in cash, at issuance, than what the liability is (the face value that you have to repay at maturity)) and the net CFO of the company issuing the debt is overstated (a smaller amount is deducted as CFO outflow). Why is a smaller CFO deducted? Well, each 6 months, payment of a coupon is made. For this bond issued at a discount, the interest at issue, or YTM, is larger than the coupon rate. As such, each 6 months, the interest calculated as YTM* book value of your liability is larger than the coupon payment, but only the coupon payment is considered CFO outflow. The difference between the actual coupon payment and the calculated interest rate goes as an adjustment of the built in loss (the discount of the bond). This difference gets added to the original book value of the liability, increasing it as time goes by and we approach maturity, so that at actual maturity, the book value of your liability equals the face value of the bond.
The general process for a period over period calculation on a bond is to XYZ has issued its bonds at $9,200, with a 6% coupon paid semi-annually and a face value of $10,000, maturing in three years. This is a discount bond, so the discount will be amortized over the 6 payment periods. General equation: Initial Liability + Interest Expense - Coupon Payment = End liability Interest expense is the initial liability times the YTM for that period. In this case Initial liability = 9,200 YTM at period 1 = 4.55% Interest expense = 9,200 * 4.55% = $418.60 Coupon = $10,000 * 3% (Par value * semi-annual interest) = $300. So $9,200 + 415.6 - 300 = 9,315.6 Continue that for 5 more periods and, if I haven’t screwed up my math, you’ll end up with a final value at Par of $10,000. The $300 cpn payment through CFO remains constant for all periods. The $415.6 for CFF will increase with each period as you approach maturity.
Well, that is pratically a non cash expense, amortization of the loss. Not really a CFF.
map1 Wrote: ------------------------------------------------------- > First, along the life of a bond you deal with CFF > only at issue and at maturity: at issue a CFF > inflow, at maturity a CFF outflow. > > The bond is issued at a discount, and as such it > has an understated CFF and an overstated CFO. By > this, it is understood that the net CFF of the > company is understated (because you receive a > smaller amount in cash, at issuance, than what the > liability is (the face value that you have to > repay at maturity)) and the net CFO of the company > issuing the debt is overstated (a smaller amount > is deducted as CFO outflow). > > Why is a smaller CFO deducted? Well, each 6 > months, payment of a coupon is made. For this bond > issued at a discount, the interest at issue, or > YTM, is larger than the coupon rate. As such, each > 6 months, the interest calculated as YTM* book > value of your liability is larger than the coupon > payment, but only the coupon payment is considered > CFO outflow. The difference between the actual > coupon payment and the calculated interest rate > goes as an adjustment of the built in loss (the > discount of the bond). This difference gets added > to the original book value of the liability, > increasing it as time goes by and we approach > maturity, so that at actual maturity, the book > value of your liability equals the face value of > the bond. Want to make sure I’m in synch with you on this. Doesn’t the amortization of the discount of premium flow through CFF?! I don’t get that from your explanation but that is my understanding.
No, I don’t think so. It is a noncash expense. Just liek depreciation/amortization.