A 2-year bond is carried on the books at a premium because it was issued at a coupn rate of 0.25% higher than the market rate. After, one year, market rates have gone down by 0.5%. The bond will now be listed on the books as having: The answer is : a lower premium than when it was originally issued, change in interest rates has no impact. I don’t understand this, interest rate will have an impact i guess as we have to calculate new book value using the new market rate? Any explaination.Thanks
no man, change in interest rates changes market value of bonds in the market. Once you buy a bond at a premium, you record it in the book and premium get amortized throught the bond’s life. You do not adjust bonds value in the books due to change in Interest rates.
The new interest rates in the market have no effect whatsoever on the book value of debt previously issued. The new interest rates are only indicative of what a company would have to pay to be able to raise money in the market. There you have the first answer, the change in market interest rates have no impact on the book value of debt previously issued. For the first part of the question: from one period to another, the book value of the debt (which initially was the premium amount) gets adjusted from one coupon payment to another, adjusted with the difference between the interest expense (YTM*book value of debt) and the actual value of the coupons, so that at maturity the book value of debt coincides with the face value of the security.
faraz70s Wrote: ------------------------------------------------------- > A 2-year bond is carried on the books at a premium > because it was issued at a coupn rate of 0.25% > higher than the market rate. After, one year, > market rates have gone down by 0.5%. The bond will > now be listed on the books as having: if you issue a bond with a coupon rater higher than the market rate, why wouldn’t it be issued at a discount? i must be missing something there.
Man, look at it the other way around. YTM