B Describe the effective intrest method and calculate interst expense, amortisation of bond discounts/premiums, and interest payments

Question 1

The effective interest rate method

Answer 1

Effective interest rate method and the reported interest expense of a bond issued at premium(Q9schw): As the premium is amortized the book value of the bond decreases until it reaches FV

Question 2

Calculate Interest Expense (Interest expense is based on the BV of the bond)(BV of a bond: The PV’s of Coupons and FV discounted at market)(Coupons: Coupon rate*FV)

Answer 2

Market %rate (Book Value)

Carrying or book value is the value of an asset or liability on the BS

carrying or BV of a bond - take Net Value, or the PV’s at market % of the coupon payments (annuities) + FV(lump sum)

Using the TI: Find the PV of the lease payments [ BGN mode: N = 5, I = 8, PMT = 10,000, FV = 0, solve PV]. Then find PV of the FV, which is the PV of coupon payments - the first payment, $43,121 - 10,000 principal payment = $33,121 {FV}, then multiply by 8% to arrive at the interest expense. #11,288, schw

Question 3

Amortisation of bond discounts, premiums

Answer 3

f

Question 4

interest payments

Answer 4

f