OR350 Feb 20 notes

# OR350 Feb 20 notes - BOND EQUATION PV = A(1(1 i)^-n i FV(1...

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Feb 20, 2008 BOND EQUATION PV = A[(1-(1+i)^(-n)) / i ] + FV/(1+i)^n Interest payments Face value payment PV equal to cash received N = number of 6 month periods FV = face value of bond i = 6 month interest rate And yield = 2; A = [face interest rate] / 2 * [face value] Face value = amount printed on bond, amount paid back at maturity Face interest rate = amount printed on bond And 1) price paid, given yield 2) ?? Note: price paid face value Face interest rate yield Must calculate I from the Bond Equation! n = 2n y n y = maturity of bond m years Case 1: Sell bond for less than face value (at a discount) What I don’t do, but might think of doing… sell 1,000,000 face value bond for \$800,000 Dr Cr [SALE] Cash 800,000 Extra Expense 200,000 Bond Payable 1,000,000 [SALE] Cash 800,000 Bond Payable 800,000 [MATURITY]Bond Payable 800,000 Extra Expense 200,000 Cash 1,000,000 Face Value Pay the amount back Cash Sale Maturity Both violate matching principle!!! Key: Spread the expense over the full maturity of the bond Kill “MORT” Amortization: killing off the extra amount over time Ways to Amortize:

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