Consolidated Enterprises issues €10 million face value, five-year bonds with a coupon rate of 6.5 percent. At the time of issuance, the market interest rate is 6.0 percent. Using the effective interest rate method of amortisation, the carrying value after one year will be closest to?
Annual coupons, or semiannual coupons?
(It won’t make much of a difference, but you might as well see the correct calculation for the situation facing you.)
I got the answer as $10,173,255.28. Could somebody else confirm this? Still learning the concept.
To get the price of the bonds initially:
FV = 10,000,000
PMT = 650,000
n = 5
i = 6
Solve for PV = −10,210,618
The first year’s interest expense is:
$10,210,618 × 6% = $612,637
The first year’s amortization of the premium is:
$650,000 − $612,637 = $37,363
The carrying value after one year is:
$10,210,618 − $37,363 = $10,173,255
S2000 has worked out ALL the steps, But buried in all that, if all you want is the carrying value of the bonds, it will be the present Value of the remaining cash flows on the bond AT THE ORIGINAL YIELD TO MATURITY.