Question

Megan buys a bond that is redeemable for its par value of 20,000 after 5 years. The bond pays coupons of 800 annually. The bond is bought to yield 8% annually. Calculate the accumulation of discount (principal) in the 4th coupon.

Answer 1

685.87.

Step-by-step explanation:

Yield (Y) = 8%

Number of periods (n) = 5 years

Par value of the bonds (FV) = 20,000

Coupon Payment (PMT) = 800

Required: accumulation of discount in 4th coupon

The amount of discount in 4th coupon would be equal to the difference between value of bond at the end of 3rd coupon payment and value of bond at the end of 4th coupon payment.

Value of bond at the end of 3rd coupon payment can be calculated using financial calculator as below:

Input. Output

Y 0.08

n. 2

PMT -800

FV -20000

PV. 18573.39

Value of bond at the end of 4th coupon payment can be calculated using financial calculator as below:

Input Output

Y. 0.08

NPER. 1

PMT. -800

FV. -20000

PV. 19259.26

Thus, amount of discount accumulated in 4th coupon payment = 19,259.26 – 18,573.39 = 685.87.