From Schweser:
A bond is issued with the following data:
- $10 million face value.
- 9% coupon rate.
- 8% market rate.
- 3-year bond with semiannual payments.
Assuming market rates do not change, what will the bond’s market value be one year from now and what is the total interest expense over the life of the bond?
Value in 1 Year Total Interest Expense
a) $10,181,495 $2,437,893
b) $10,181,495 $2,962,107
c) $11,099,495 $2,437,893
Why is the answer A? I can understand the reasons for the value of the bond being $10,181,495 after the first year but why is the interest expense $2,437,893? The rationale given is that the total interest expense is the total paid on the bond i.e. 450,000 x 6 - 262,107 (amortization of the bond). But why are the coupon payments not discounted?
Any help is appreciated. Thanks s