Original practice · fully worked
Original variant: one-period premium amortization for a theatre bond
Immediately after a coupon, a theatre bond has book value 2,050. The periodic yield is 3%, and the next coupon is 70. Calculate the premium amortized during the next coupon period.
- A
5.00 - B
7.00 - C
8.50 - D
10.00 - E
11.50
Answer and calculation
The next book value is 2,041.50, so book value falls by 8.50, choice C.
Setup
Setup
Accrete the current book value at the periodic yield, then remove the coupon paid at period-end.
BVk+1=2050(1.03)−70=2041.50 Model
Model
Because the bond is at a premium, the post-coupon book value declines and that decline is premium amortization.
amortization=BVk−BVk+1 Compute
Compute
The next book value is 2,041.50, which is 8.50 below the current 2,050.
amortization=2050−2041.50=8.50 Answer
Answer
The premium amortized in the period is 8.50, choice C.
8.50(C) 