premium amortization schedule

Question

A bond has a face value of $2,000 redeemable in 5 years at a coupon rate of 8%. Construct the premium amortization schedule if the bond is to be purchased to yield 6%. 

Answer 1

Assuming the coupon rate is payable at the end each year....therefore,

 

Price= 0.08*2000{ (1.06)^-1 +(1.06)^-2 + (1.06)^-3 + (1.06)^-4 +(1.06)^-5}   +  2000*(1.06)^-5

 

Answer 2

Hi there!

In order to construct the bond premium amortization schedule, the price that the bond sold for is needed. The fact that there is a bond premium indicates that the bond price exceeds the face value of the bond. Also, are you using the straight line method to amortize or the effective interest rate method? This makes a difference in how much amortization can be taken each year.