Actuarial Exam 2/FM Prep: Amortize a Bond Bought at a Premium

Financial Math for Actuarial Exam 2 (FM), Video #107. I made up problem for an amortization schedule of a bond bought at a premium. Part 1: fill in the amortization schedule with numbers. Part 2: look at patterns in the schedule and use algebra to find formulas (confirm with a calculator as well).

A $1000 two-year 12% bond, redeemable at par, with semiannual coupons, is bought at a premium to yield an 8% return, convertible semiannually. Construct an amortization schedule to show the amortization of the premium and the outstanding balances (“book values”) just after coupons are paid at the end of each half-year. Find the totals for the columns for the interest earned, payments, and principal repaid. Finally, construct general formulas from the patterns.

Half-Year t 0
1 2 3 4
Totals
Interest It
Payment Kt
Principal Rep PRt
Out Bal (Book Val) OBt = BVt

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