Bond Amortization | Exam FM | Financial Mathematics Lesson 23 - JK Math

Amortization For Bonds (Financial Mathematics Lesson 23)

In this lesson we learn about how to use the amortization method for bonds by viewing a bond as an amortized loan. We discuss the notation for the components of the amortization method for bonds, and look at the various formulas that will be used. Then we look at an example of using these formulas to fill in an amortization schedule for a bond.

This course is designed to help students understand the concepts of mathematics of investment and credit, as well as provide a starting point in preparation for the Actuarial Exam FM (Financial Mathematics).

Financial Mathematics requires a proficient understanding of Calculus concepts such as derivative and integration techniques. This implies that a solid understanding in various algebra skills, including manipulating equations, basic factoring methods, solving logarithmic equations, and more, are also required to fully comprehend and learn the concepts of the Financial Mathematics course.

Video Chapters:
0:00 Components of Bond Amortization
4:36 Formulas for Bond Amortization
7:39 Example - Amortization Schedule
18:46 Extra Formulas

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[pochenlai]

Hi, it's me again! I'm a little bit confused about the relation of book value of the bond and the price of the bond. So the BV0 is the present value aka the bond price, in the example here, r>i so it's a premium bond, which if it's a callable bond we want to call it at the earliest date possible. But here we see the book value of the bond is actually decreasing(write down), making the book value on the earliest possible day more expensive than the book value on the latest possible date, isn't that contradict to the idea of buying it at the lowest possible present value(from the issuer aka the buyer pov)?

[EjBei]

Hi it’s me again! I was just wondering how I should view Ci (redemption times yield rate). I couldn’t find the video on premium / discount bonds. But I just don’t undertand what why it’s a premium when Fr>Ci and a discount when Fr<Ci. Thank you

[chrismarrone]

Does the formula F(r-i)V^n-t+1 only work if the face value equals the redemtion value?

I came across another formula that is: (Ci-Fr)Vn^n-t+1... this seems to be if F and C are different

[chrismarrone]

This is the concept of "write-down" of premium and "write-up" of discount correct?

[lucasm]

Are there formulas to find the interest and principal paid at any time instead of constructing the table?

[chrismarrone]

Isn't it more intuitive for the formulas to say BV(t) = BV (t-1) - PR(t) INSTEAD of BV(t+1) = BV(t) - PR (t+1).

If I ask you for the book value at time 2. It seems more intuitive to use the first formula rather than the second.