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14 May, 07:17

Refer to the amortization tables in your slides. If the beginning balance of the bond (issued at a discount) is $885.30, the cash payment is $50 (coupon rate is 5%, face value of bond is $1,000), and the annual market interest rate for the period is 6%, what is the amount of amortization and the ending balance of the bond

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  1. 14 May, 07:35
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    The correct answer is $3.12 and $888.42.

    Explanation:

    According to the scenario, the given data are as follows:

    Beginning balance = $885.30

    cash payment = $50

    Face value of bond = $1,000

    Interest rate = 6%

    We can calculate the amortization amount by using following formula:

    Amortization amount = Interest expense - cash payment

    Where, Interest expense = Beginning balance * interest rate

    = 885.30 x 6%

    = $53.12

    By putting the value, we get

    Amortization amount = 53.12 - 50

    = $3.12

    And, Ending balance of bond = Beginning balance of bond + Amortization amount

    = 855.30 + 3.12

    = $888.42
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