BONDS

BES 223 ENG. ECONOMY

 AMORTIZATION OF PREMIUM

• When a bond is purchased at a higher value than

the redemption value, it is said to be bought at
premium.

• The premium is paid back in installments as part of

the coupon payments on the redemption date.
 EXAMPLE PROB. 1

• A ₱ 8,000 bond, redeemable at 105%, pays interest at 6%

to yield the buyer 5 %, m = 4 for 2 years. Determine the
coupon payment, redemption value, purchase price,
bond premium, and construct a schedule of
amortization of premium.

• Solution:

• Cp = ₱ 120
• RV = ₱ 8,400
• Pp = ₱ 8,513.51
• Bp = ₱ 113.51
 AMORTIZATION OF PREMIUM

End of period Yield Cp Credit to Book Value

(BV x i) premium (BV)
(Cp – Y)
0 ₱ 8,513.51
1 ₱ 106.42 ₱ 120 ₱ 13.58 8,499.93
2 106.25 120 13.75 8,486.18
3 106.08 120 13.92 8,472.26
4 105.90 120 14.10 8,458.16
5 105.73 120 14.27 8,443.89
6 105.55 120 14.45 8,429.44
7 105.37 120 14.63 8,414.81
8 105.19 120 14.81 8,400.00
₱ 846.49 ₱ 960 ₱ 113.51
 ACCUMULATION OF DISCOUNT

• When a bond is purchased at a value lower than

the redemption value, it is said to be bought at a
discount.

• The process of adding the unpaid interest to the

value of the bond.
 EXAMPLE PROB. 2

• A ₱ 4,000 bond, with interest at 6% compounded

quarterly is redeemable at 110% at the end of 2 years
and priced to yeild 7 %. Find the bond discount,
purchase price and make out a bond schedule showing
the accumulation of discount.

• Solution:

• Cp = ₱ 60
• RV = ₱ 4,400
• Pp = ₱ 4,274.11
• Bd = ₱ 125.89
 ACCUMULATION OF DISCOUNT

End of period Yield Cp For acc. of Book Value

(BV x i) disc. (Y - Cp) (BV)
0 ₱ 4,274.11
1 ₱ 74.80 ₱ 60 ₱ 14.80 4,288.91
2 75.06 60 15.06 4,303.97
3 75.32 60 15.32 4,319.29
4 75.59 60 15.59 4,394.88
5 75.86 60 15.86 4,350.74
6 76.14 60 16.14 4,366.88
7 76.42 60 16.42 4,383.30
8 76.71 60 16.71 4,400.01
₱ 605.90 ₱ 480 ₱ 125.90
 SEAT WORK BY PAIR

• 1. A ₱ 6,000 bond with interest at 5%, compounded

semiannually is redeemable at 103 % at the end of
4 years and priced to yeild 7%, make a complete
accumulation of discount table.

• 2. A ₱ 5,000 bond with interest at 5 ½% payable

semiannually, redeemable at par at the end of 3
years and is priced to yeild 4 ½% . Find the coupon
payment, purchase price, bond premium and
construct a schedule of amortization of premium.