Principles of Banking & Finance: Calculation of Annual Payment and Bond Pricing

PRINCIPLE OF BANKING & FINANCE
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Question 1
The determination of the annual payment for discharging the debt can be made using the
following formula (Parrino & Kidwell, 2014).
PVA = PMT (1-(1/(1+r)n))/r
Based on the information provided, PVA = 60% *10,000 = $6,000, i= 8% p.a., n=3
Hence, 6000 = PMT (1-(1/1.083))/0.08
Solving the above, PMT = $2,328.20
The amortisation table is indicated below.
Total interest paid in three years = 480 + 332.14 +172.46 = $ 984.60
Question 2
The given information about the bond is summarised below.
Par value= $ 1,000
Annual coupon payment = (9/100)*1000 = $ 90
Time of maturity = 14 years
Current price = $ 1,120
a) The requisite formula for pricing of bond is indicated below (Brealey, Myers & Allen,
2014)