Issued $200m with 10% coupon semi annual coupon payements. 4 years maturity Market IR are 7% The interest expense on this bond will be less than the coupon payments True/false? It’s obviously a premium bond and so the interest payments will amortise the value to par over the life of the bond. So am I right in saying that total interest payments will be $200M - Present Value at beginning of period? So you just calc total coupon payments (semi annual payments x 8) and see what’s greater, is this correct?

False, for premium bond the interest expense is less than the coupon pmt. This is how you amortize the book value to par.

Sorry I mean True for regarding the question. Doh’ need to read the Q properly

victorh Wrote: ------------------------------------------------------- > False, for premium bond the interest expense is > less than the coupon pmt. How do you know that though? Am I right in saying that total interest payments will be $200M - Present Value at beginning of period? So you just calc total coupon payments (semi annual payments x 8) and see what’s greater, is this correct?

Not really. You don’t need to do any math for this one. Just think intuitively. The coupon that is actually being paid is higher than required = premium bond (as you said). The coupon payment is made up of 1) interest expense and 2) principle repayment to amortize the premium. Therefore, int expense + priciple repayment = coupon (if at a premium).

makes perfect sense, thanks.