Interest

Assume a city issues a \$5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. What is the interest expense in the second semiannual period? A) \$80,000. B) \$210,831. C) \$106,552. D) \$123,644.

B?

I computed B by using the market value of the bonds and the market rate of interest. BUT interest expense = coupon payment - bond discount amortization. So I am probably wrong. I need to do a hardcore review of SS9. Someone please answer.

This is as easy as it looks. Can someone post a walkthrough? I fumbled it.

"Assume a city issues a \$5 million bond to build a new arena. The bond pays 8 percent semiannual interest and will mature in 10 years. Current interest rates are 9%. What is the interest expense in the second semiannual period? " Compute the PV of the bond one year after issuance: FV=5,000,000 PMT=200000 (5,000,000*0.04) n=19 I/Y=4.5 PV = -4,685,167.66 PV*0.045 = 210,832.55

Its a discount bond. and hence as the bond matures, the Price must converge to the FV. In order to do that, you’ll have to pay more interest, than what is due right now. ie. The only answer choice was B that was greater than 200k.

If the answer options were, 210k 205k 207k i’d get to crunch numbers only then.

You computed correctly. For a discount bond, the interest expense is greater than the coupon, and the difference is th amortization that goes to increase the liability. So, N=20, I/Y=4.5, PMT=200,000, FV=5,000,000=>CPT PV=4,674,801.59 Interest expense in the first period is 4.5%*4,674,801.59=210,366.07 The difference between the coupon of 200,000 and the interest expense increases the book value of your liability to 4,685,167.77 to which apply the 4.5% period rate to get the answer: B.

Thanks pepp and map1, that clears up a lot of questions I would have otherwise posted about financing liabilities

you done it the shortest way, so that’s even greater:)

I didn’t do it. even better. but I am just wondering how long i could keep my logic going, cuz to be honest, I know none of the calculation you guys do, except for applying a bit of my common sense.

That depends on your life expectancy, drug consumption, medical history and other things:)) edit: the logic that is

<<>> YES, BOND HAS TO WORK ITS WAY BACK up TO par

supersharpshooter Wrote: ------------------------------------------------------- > "Assume a city issues a \$5 million bond to build a > new arena. The bond pays 8 percent semiannual > interest and will mature in 10 years. Current > interest rates are 9%. What is the interest > expense in the second semiannual period? " > > Compute the PV of the bond one year after > issuance: > > FV=5,000,000 > PMT=200000 (5,000,000*0.04) > n=19 > I/Y=4.5 > > PV = -4,685,167.66 > > PV*0.045 = 210,832.55 careful, you meant one period, not one year. That is why you use 19 for N, b/c it asked for the second pmt.