FINANCIAL ASSET AT AMORTIZED COST

Bond
 A formal unconditional promise made under seal to pay a specified sum of money at a
determinable future date, and to make periodic interest payments at a stated rate until the
principal sum is paid.
 A contract of debt (debt security) whereby one party called the issuer borrows fund from another
party called the investor.
 Evidenced by a certificate and the contractual agreement is contained in a document known as
bond indenture.

Classification of bond investments

 Bonds may be acquired as current or noncurrent investment depending on the business of
managing financial assets.
a. Financial asset held for trading
b. Financial asset at amortized cost
c. Financial asset – FVOCI
d. Financial asset – FVPL by fair value option

Initial measurement
 PFRS 9, paragraph 5.1.1, provides that bond investments are recognized initially at fair value plus
directly attributable transaction costs.
 However, transaction costs attributable to the acquisition of bond investments held for trading
or at FVPL are expensed immediately.

Subsequent measurement
a. At FVPL
b. At FVOCI
c. At amortized cost

Acquisition of bond investments

 When bonds are acquired on interest date, the purchase price is initially recognized as the
acquisition cost.
 When bonds are acquired between interest dates, the purchase price normally includes the
accrued interest which is charged either to accrued interest receivable or interest income.
o Illustration:
An entity acquired 12% bonds with face amount of P2,000,000 for P2,200,000 which includes accrued interest of
P20,000. The bonds are held for trading.
Trading securities 2,180,000
Accrued interest receivable 20,000
Cash 2,200,000
When the first semiannual interest of P120,000 is received:
Cash 120,000
Accrued interest receivable 20,000
Interest income 100,000
If the accrued interest is charged to interest income:
Trading securities 2,180,000
Interest income 20,000
Cash 2,200,000
When the first semiannual interest of P120,000 is received:
Cash 120,000
Interest income 120,000

Illustration – trading securities

On April 1, purchased P1,000,000 12% bonds at 96 plus accrued interest. Interest is payable January 1 and July 1.
The bonds are held as trading investment.
Trading securities 960,000
Interest income 30,000
Cash 990,000
Received semiannual interest on July 1.
Cash 60,000
Interest income 60,000
On Oct. 31, sold P600,000 face value bonds for 101 plus accrued interest.
Cash 630,000
Trading securities 576,000
Interest income 24,000
Gain on sale of trading securities 30,000

Sale price (600,000 x 101) 606,000

Add: Accrued interest from July 1 to October 31
(600,000 x 12% x 4/12) 24,000
Total cash received 630,000

Sale price (600,000 x 101) 606,000

Less: Carrying amount of bonds sold
(600,000 x 96) 576,000
Gain on sale 30,000
On Dec. 31, recorded the accrued interest from July 1 to December 31 on the remaining P400,000 bonds.
Accrued interest receivable 24,000
Interest income 24,000
On this date, the bonds are quoted at 120 at the end of the year. Changes in fair value of trading securities are
recognized in P/L.
Trading securities 96,000
Unrealized gain - TS 96,000

Market value (400,000 x 120) 480,000

Carrying amount of remaining bonds (400,000 x 96) (384,000)
Unrealized gain 96,000

Investment in bonds at amortized cost

 PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if the
business model is to hold the financial asset in order to collect contractual cash flows (principal
and interest on the outstanding principal) on specified date.
Amortized cost
 Initial recognition amount of the investment minus repayments, plus amortization of discount,
minus amortization of premium, and minus reduction for impairment or uncollectiblity.
 When bonds are measured at amortized cost, they are classified as noncurrent investments.

Amortization of premium or discount

 Bond premium/discount is amortized over the life of the bonds. On the part of the bondholder,
the life of the bonds is from the date of acquisition to the date of maturity.
 Amortization is done through the interest income account on interest dates or at the end of the
reporting period.
a. Amortization of bond discount:
Investment in bonds xx
Interest income xx
b. Amortization of bond premium:
Interest income xx
Investment in bonds xx
 Bond premium
o Conceptually a loss on the part of the bondholder because he paid more than what can
be collected on the date of maturity. Such loss is not recognized outright but allocated
over the life of the bonds to be offset against interest income to be derived from the
bond investment.
 Bond discount
o Conceptually a gain on the part of the bondholder because he paid less than what can
be collected on the date of maturity. Such gain is not recognized outright but allocated
over the life of the bonds to be added to the interest income derived from the bond
investment.

Illustration – acquisition on interest date

On April 1, 20x5, purchased P1,000,000 face amount 12% bonds at 94. Bonds pay interest semiannually April 1 and
October 1 and mature on April 1, 20y0.
Investment in bonds 940,000
Cash 940,000
On Oct. 1, 20x5, received semiannual interest.
Cash 60,000
Interest income 60,000
On Dec. 31, 20x5, adjustment is made for the accrued interest.
Accrued interest receivable 30,000
Interest income 30,000
Also, amortized the bond discount for 9 months from April 1 to December 31, 20x5 using the straight line method.
Investment in bonds 9,000
Interest income 9,000

Face amount 1,000,000

Cost (1,000,000 x 94) 940,000
Discount 60,000
Annual amortization (60,000/ 5 years) 2,000
Amortization for 9 months (12,000 x 9/12) 9,000
On Jan. 1, 20x6, the adjustment for accrued interest is reversed.
Interest income 30,000
Accrued interest receivable 30,000
On April 1, 20x5, received semiannual interest.
Cash 60,000
Interest income 60,000
On Oct. 1, 20x6, received semiannual interest.
Cash 60,000
Interest income 60,000
On Dec. 31, 20x6, adjustment is made for the accrued interest.
Accrued interest receivable 30,000
Interest income 30,000
Also, amortized the bond discount for one year.
Investment in bonds 12,000
Interest income 12,000
During the life of the bonds, the investment account will appear as follows:
Investment in bonds
April 1, 20x5 Cost 940,000 Balance, April 1, 20y0 1,000,000
Dec. 31, 20x5 Amortization 9,000
Dec. 31, 20x6 Amortization 12,000
Dec. 31, 20x7 Amortization 12,000
Dec. 31, 20x8 Amortization 12,000
Dec. 31, 20x9 Amortization 12,000
April 1, 20y0 Amortization 3,000 ________
1,000,000 1,000,000

On April 1, 20y0, the bond is redeemed.

Cash 1,000,000
Investment in bonds 1,000,000

Illustration – acquisition between interest dates

On Feb. 1, purchased 12% P1,000,000 face amount bonds at 105 plus accrued interest on Feb. 1, 20x5. Interest is
payable semiannually on April 1 and October 1. Bonds are dated April 1, 20x4 and mature on April 1, 20x9.
Investment in bonds 1,050,000
Interest income 40,000
Cash 1,090,000

Cost (1,000,000 x 105) 1,050,000

Add: Accrued interest from Oct. 1, 20x4 to
Feb. 1, 20x5 (1,000,000 x 12% x 4/12) 40,000
Total cash paid 1,090,000
On April 1, 20x5, received semiannual interest.
Cash 60,000
Interest income 60,000
On Oct. 1, 20x5, received semiannual interest.
Cash 60,000
Interest income 60,000
On Dec. 31, 20x5, adjustment is made for the accrued interest.
Accrued interest receivable 30,000
Interest income 30,000
Also, amortized the bond premium for 11 months from Feb. 1 to Dec. 31, 20x5 using the straight line method.
Interest income 11,000
Investment in bonds 11,000

Face amount 1,000,000

Cost (1,000,000 x 105) 1,050,000
Premium 50,000
Life of bonds = Feb. 1 20x5 to April 1, 20x9 50 months
Monthly amortization (50,000/50) 1,000

During the life of the bonds, the investment account will appear as follows:
Investment in bonds
Feb. 1, 20x5 1,050,000 Dec. 31, 20x5 Amortization 11,000
Dec. 31, 20x6 Amortization 12,000
Dec. 31, 20x7 Amortization 12,000
Dec. 31, 20x8 Amortization 12,000
April 1, 20x9 Amortization 3,000
1,000,000 Balance April 1, 20x9 1,000,000
1,050,000 1,050,000

On April 1, 20x9, the bond is redeemed.

Cash 1,000,000
Investment in bonds 1,000,000

Sale of bonds prior to maturity

 The carrying amount of the bond investment must be determined to be used as basis in
computing gain or loss on the sale.
 Amortization should be recognized up to the date of sale.
 If the sale is between interest dates, the sale price normally includes the accrued interest.
 The difference between the sale price, after deducting the accrued interest, and the carrying
amount of the bond investment represents the gain or loss on the sale.
 Illustration:
On Aug. 1, 20x5, purchased 12% P1,000,000 face amount bonds for P1,075,000 including accrued interest. Interest
is payable semiannually May 1 and November 1. Bonds are dated May 1, 20x5 and mature May 1, 20x9.
Investment in bonds 1,045,000
Interest income 30,000
Cash 1,075,000
On Nov. 1, 20x5, received semiannual interest.
Cash 60,000
Interest income 60,000
On Dec. 31, 20x5, adjustment is made for the accrued interest.
Accrued interest receivable 20,000
Interest income 20,000
Also, amortized the bond premium for 5 months from Aug. 1 to Dec. 31, 20x5 using the straight line method.
Interest income 5,000
Investment in bonds 5,000
 Face amount 1,000,000
Cost after deducting the accrued interest 1,045,000
Premium 45,000
Life of bonds = Aug. 1 20x5 to May 1, 20x9 45 months
Monthly amortization (50,000/50) 1,000
On Feb. 1, 20x7, the bonds were sold at 108 plus accrued interest.
a. To update the amortization of the premium up to the date of sale. Presumably, the last amortization was
Dec. 31, 20x6.
Interest income 1000
Investment in bonds 1,000
b. To record the sale of bonds.
Cash 1,110,000
Investment in bonds 1,027,000
Interest income 30,000
Gain on sale of bond investment 53,000

Sale price (1,000,000 x 108) 1,080,000

Add: Accrued interest for three months from
Nov. 1 20x6 to Feb. 1, 20x7 (1,000,000 x 12% x 3/12) 30,000
Total cash received 1,110,000

Original cost 1,045,000

Less: Amortization from Aug. 1, 20x5 to Feb. 1, 20x7 18,000
Carrying amount on date of sale 1,027,000
Sale price (1,000,000 x 108) 1,080,000
Gain on sale 53,000

Callable bonds
 Bonds that may be called in or redeemed by the issuing entity prior to their date of maturity.
 Usually, the call price or redemption price is at a premium.
 The difference between the redemption price and the carrying amount of the bond investment
on the date of redemption is recognized in P/L.

Convertible bonds
 Bonds which give the bondholders the right to exchange their bonds for share capital of the
issuing entity at any time prior to maturity.
 Investment in convertible bonds are classified as financial assets measured at fair value.

Serial bonds
 Bonds which have a series of maturity dates or those which are payable in installments.

Term bonds
 Bonds that mature on a single date.
 Callable and convertible bonds can be classified as term bonds despite their special features.

Methods of amortization
a. Straight line method – provides for an equal amount of amortization each accounting period.
b. Bond outstanding method – applicable to serial bonds and provides for a decreasing amount of
amortization.
 c. Effective interest method – provides for an increasing amount of amortization.
o Nominal rate – the coupon/stated rate appearing on the face of the bond.
o Effective rate – the yield/market rate which is the actual rate of interest which the
bondholder earns on the investment.
o Bond premium: Nominal > Effective
o Bond discount: Nominal < Effective
o PFRS 9, bond investments shall be classified as financial assets measured at amortized
cost using the effective interest method.
o The other methods are acceptable only when the computation will result in periodic
interest income that is not materially different from the amount that would be computed
using the effective interest method.

Illustration – straight line method

Discount Premium
Face amount of bonds 2,000,000 Face amount of bonds 2,000,000
Acquisition cost on Jan. 1, 20x5 1,850,000 Acquisition cost on Jan. 1, 20x5 2,200,000
Date of bonds Jan. 1, 20x5 Date of bonds Jan. 1, 20x5
Date of maturity Jan. 1, 20x8 Date of maturity Jan. 1, 20x9
Interest payable semiannually on Interest payable annually on
June 30 and Dec. 31 12% Dec. 31 12%
Acquisition on Jan. 1: Acquisition on Jan. 1:
Investment in bonds 1,850,000 Investment in bonds 2,200,000
Cash 1,850,000 Cash 2,200,000
Collection of interest on June 30: Collection of interest on Dec. 31:
Cash 120,000 Cash 240,000
Interest income 120,000 Interest income 240,000
Collection of interest on Dec. 31: Annual amortization of premium:
Cash 120,000 Interest income 50,000
Interest income 120,000 Investment in bonds 50,000
Annual amortization of discount:
Investment in bonds 50,000
Interest income 50,000

Illustration – bond outstanding method

Discount Premium
Face amount of bonds 2,000,000 Face amount of bonds 4,000,000
Acquisition cost on Jan. 1, 20x5 1,900,000 Acquisition cost on Jan. 1, 20x5 4,200,000
Annual installment every Dec. 31 500,000 Annual installment every Dec. 31 1,000,000
Date of bonds Jan. 1, 20x5 Date of bonds Jan. 1, 20x5
Interest payable semiannually on Interest payable annually on
June 30 and Dec. 31 12% Dec. 31 12%
Acquisition on Jan. 1, 20x5: Acquisition on Jan. 1, 20x5:
Investment in bonds 1,900,000 Investment in bonds 4,200,000
Cash 1,900,000 Cash 4,200,000
Collection of interest on June 30, 20x5: Collection of interest on Dec. 31, 20x5:
Cash 120,000 Cash 480,000
Interest income 120,000 Interest income 480,000
 Collection of interest on Dec. 31, 20x5: Amortization of premium:
Cash 120,000 Interest income 80,000
Interest income 120,000 Investment in bonds 80,000
Amortization of discount: Bond Premium
Investment in bonds 40,000 Year outstanding Fraction Amortization
Interest income 40,000
20x5 4,000,000 4/10 80,000
Bond Discount 20x6 3,000,000 3/10 60,000
Year outstanding Fraction Amortization 20x7 2,000,000 2/10 40,000
20x5 2,000,000 20/50 40,000 20x8 1,000,000 1/10 20,000
20x6 1,500,000 15/50 30,000 10,000,000 200,000
20x7 1,000,000 10/50 20,000
20x8 500,000 5/50 10,000 To record the first installment
5,000,000 50,000 Cash 1,000,000
Investment in bonds 1,000,000
To record the first installment Collection of interest on Dec. 31, 20x6:
Cash 500,000 Cash 480,000
Investment in bonds 500,000 Interest income 480,000
Collection of interest on June 30, 20x6: Amortization of premium:
Cash 120,000 Interest income 60,000
Interest income 120,000 Investment in bonds 60,000
Collection of interest on Dec. 31, 20x6:
Cash 120,000
Interest income 120,000
Amortization of discount:
Investment in bonds 30,000
Interest income 30,000

Illustration – effective interest method – discount

On Jan. 1, 20x5, an investor acquired P1,000,000 face amount bonds. The life of the bonds is 2 years and 8% interest
is payable semiannually on June 30 and Dec. 31. The cost of the bonds is P964,540, a price which will yield a 10%
effective rate per year.
Jan. 1 Investment in bonds 964,540
Cash 964,540

June 30 Cash 40,000

Interest income 40,000

Investment in bonds 8,227

Interest income 8,227

Interest Interest Discount Carrying

Date received income amortization amount
Jan. 1, 20x5 964,540
June 30, 20x5 40,000 48,227 8,227 972,767
Dec. 31, 20x5 40,000 48,638 8,638 981,405
June 30, 20x6 40,000 49,070 9,070 990,475
Dec. 31, 20x6 40,000 49,525 9,525 1,000,000

Dec. 31 Cash 40,000

Interest income 40,000
 Investment in bonds 8,638
Interest income 8,638

Illustration – effective interest method – premium

On Jan. 1, 20x5, an investor acquired P1,000,000 face amount bonds. The bonds mature in 3 years and bear 12%
interest payable annually every Dec. 31. The cost of bonds is P1,049,740, a price which will yield an effective interest
of 10%.
Jan. 1 Investment in bonds 1,049,740
Cash 1,049,740

Dec. 30 Cash 120,000

Interest income 120,000

Investment in bonds 15,026

Interest income 15,026

Interest Interest Premium Carrying

Date received income amortization amount
Jan. 1, 20x5 1,049,740
Dec. 31, 20x5 120,000 104,974 15,026 1,034,714
Dec. 31, 20x6 120,000 103,471 16,529 1,018,185
Dec. 31, 20x7 120,000 101,815 18,185 1,000,000

Illustration – effective interest method – serial bonds

Face amount 4,000,000
Acquisition cost 4,171,810
Annual installment every Dec. 31 1,000,000
Date of issue Jan. 1, 20x5
Nominal interest rate payable annually 10%
Effective interest rate 8%

Jan. 1 Investment in bonds 4,171,810

Cash 4,171,810

Dec. 30 Cash 1,400,000

Investment in bonds 1,000,000
Interest income 400,000

Interest income 66,255

Investment in bonds 66,255

Date Interest Interest Premium Principal Carrying

received income amortization payment amount
Jan. 1, 20x5 4,171,810
Dec. 31, 20x5 400,000 333,745 66,255 1,000,000 3,105,555
Dec. 31, 20x6 300,000 248,444 51,556 1,000,000 2,053,999
Dec. 31, 20x7 200,000 164,320 35,680 1,000,000 1,018,319
Dec. 31, 20x8 100,000 81,681 18,319 1,000,000 -
Bond investment - FVOCI
 The business model is achieved both by collecting contractual cash flows (principal and interest
on the outstanding principal) and by selling the financial asset.
 PFRS 9, paragraph 4.1.2A, mandates that interest income for bond investment measured at
FVOCI must be calculated using the effective interest method and included in P/L.
 The entity must record amortization in accordance with the effective interest table regardless of
the change in market value.
 On derecognition, the cumulative gain and loss recognized in OCI shall be reclassified to P/L.
 Illustration:
On Jan. 1, 20x5, an entity purchased bonds with face amount of P5,000,000 for P4,760,000 including transaction
cost of P160,000. The business model is to collect contractual cash flows and to sell the financial asset. The bonds
mature on Dec. 31, 20x7 and pay 10% interest annually on Dec. 31 with a 12% effective yield.
20x5
Jan. 1 Financial asset - FVOCI 4,760,000
Cash 4,760,000

Dec. 30 Cash 500,000

Interest income 500,000

Financial asset - FVOCI 71,200

Interest income 71,200

Interest Interest Discount Carrying

Date received income amortization amount
Jan. 1, 20x5 4,760,000
Dec. 31, 20x5 500,000 571,200 71,200 4,831,200
Dec. 31, 20x6 500,000 579,744 79,744 4,910,944
Dec. 31, 20x7 500,000 589,056 89,056 5,000,000

On Dec. 31, 20x5, the bond investment is measured at FVOCI. Assume the bonds are quoted at 102 on this date.
Financial asset - FVOCI 268,800
Unrealized gain - OCI 268,800

Market value (5,000,000 x 102) 5,100,000

Carrying amount – Dec. 31, 20x5 4,831,200
Unrealized gain - OCI 268,800
20x6
Dec. 30 Cash 500,000
Interest income 500,000

Financial asset - FVOCI 79,744

Interest income 79,744
The bonds are quoted at 105 on this date.
Financial asset - FVOCI 70,256
Unrealized gain - OCI 70,256

Market value (5,000,000 x 105) 5,250,000

Investment balance – Dec. 31, 20x6 (4,910,944 + 268,800) 5,179,744
Increase in unrealized gain - OCI 70,256
On June 30, 20x7, the bonds are sold at 110 plus accrued interest.
Financial asset - FVOCI 44,528
Interest income (89,056 x 6/12) 44,528

Cash 5,750,000
Unrealized gain – OCI 339,056
Financial asset – FVOCI 5,294,528
Gain on sale of financial asset 544,528
Interest income 250,000

Sale price (5,000,000 x 110) 5,500,000

Carrying amount – June 30, 20x7 (4,910,944 + 44,528) 4,955,472
Gain on sale of financial asset 544,528

Sale price 5,500,000

Accrued interest from Jan. 1 to June 30, 20x7 250,000
Total cash received 5,750,000

Fair value option

 All changes in fair value are recognized in P/L. Accordingly, any transaction cost incurred is an
outright expense.
 Interest income is based on the nominal rate rather than the effective rate.
 Illustration:
On Jan. 1, 20x5, an entity purchased bonds with face amount of P5,000,000 for P5,400,000 plus broker commission
of P100,000.
Financial asset - FVPL 5,4000,000
Commission expense 100,000
Cash 5,500,000
The stated rate is 8% payable annually every Dec. 31. The bonds are acquired to yield an effective rate of 6%.
Cash 400,000
Interest income 400,000
On Dec. 31, 20x5, the bonds had a fair value of P5,600,000.
Financial asset - FVPL 200,000
Gain from change in fair value 200,000

Computation of effective rate

 Determined by means of interpolation process.
 The basic theory is to find an effective rate that would equate the acquisition cost and the present
value of the future cash flows from the bonds.
PV of principal xx
PV of future interest payments xx
Total PV of cash flows xx
 Bond premium: Effective < Nominal
 Bond discount: Effective > Nominal
 Illustration:
On Jan. 1, 20x5, an entity purchased bonds with face amount of P5,000,000 at a cost of P4,650,000. The nominal
interest rate is 10% payable annually every Dec. 31. The bonds mature on Jan. 1, 20y0 or in 5 years.

The acquisition is at a discount, the effective rate > nominal rate of 10%.
Using the rate of 11%:
PV of principal (5,000,000 x .5935) 2,967,500
PV of future interest payments (500,000 x 3.6959) 1,847,950
Total PV of cash flows 4,815,450

Acquisition cost < PV of the bonds: The effective rate must be > 11%.

Using the rate of 12%:

PV of principal (5,000,000 x .5674) 2,837,000
PV of future interest payments (500,000 x 3.6048) 1,802,400
Total PV of cash flows 4,639,400

11% = 4,815,450
165,450
? = 4,650,000 176,050
12% = 4,639,400

165,450
= 11% + ( 𝑥 1%)
176,050
= 11% + .94%
= 11.94%
 Another illustration
On Jan. 1, 20x5, an entity purchased bonds with face amount of P10,000,000 at 103 or P10,300,000. The nominal
rate is 10% payable annually on Dec. 31. The bonds mature on Jan. 1, 20y0, or a maturity of 5 years.

The acquisition is at a premium, the effective rate < nominal rate of 10%.
Using the rate of 9%:
PV of principal (10,000,000 x .6499) 6,499,000
PV of future interest payments (1,000,000 x 3.8897) 3,889,700
Total PV of cash flows 10,388,700

Acquisition cost < PV of the bonds: The effective rate must be > 9%.

Using the rate of 10%:

PV of principal (10,000,000 x .6209) 6,209,000
PV of future interest payments (1,000,000 x 3.7908) 3,790,800
Total PV of cash flows 9,999,800

9% = 10,388,700
88,700
? = 10,300,000 388,900
10% = 9,999,800

88,700
= 9% + ( 𝑥 1%)
388,900
= 9% + .23%
= 9.23%

Purchase price/market price of bonds

1. Using the effective rate, find the PV of an ordinary annuity of 1 for the number of interest periods
involved.
2. Nominal rate x face amount for one interest period minus effective rate x face amount for one
interest period.
3. No. 2 multiply by No. 1 = discount/premium
4. Face amount plus/minus No. 3 = purchase price of the bond
  Another approach:
o Using the effective rate:
PV of principal xx
PV of future interest payments xx
Total PV of cash flows xx

 Illustration – On interest date (purchase price on Jan. 1, 20x5?)

Illustration 1 Illustration 2
Face amount of bonds 3,000,000 Face amount of bonds 3,000,000
Date of issue Jan. 1, 20x5 Date of issue Jan. 1, 20x5
Nominal rate 8% Nominal rate 6%
Effective rate 6% Effective rate 8%
Semiannual interest Jan. 1 and July 1 Annual interest Dec. 31
Date of maturity Jan. 1, 20x7 Date of maturity Jan. 1, 20x8
1. The PV of an ordinary annuity of 1 for 4 periods at 1. The PV of an ordinary annuity of 1 for 3 periods at
3% is 3.7171 8% is 2.5771

2. 4% x 3,000,000 = 120,000 nom. > eff. 2. 6% x 3,000,000 = 180,000 nom. < eff.
3% x 3,000,000 = 90,000 8% x 3,000,000 = 240,000
Premium 30,000 Discount 60,000

3. 30,000 x 3.7171 = 111,513 3. 60,000 x 2.5771= 154,626

4. 3,000,000 + 111,513 = 3,111,513 4. 3,000,000 - 154,626 = 2,845,374

OR (using the effective rate) OR (using the effective rate)

PV of principal 2,665,461 PV of principal 2,381,497

PV of future interest payments 446,052 PV of future interest payments 463,877
Total PV of cash flows 3,111,513 Total PV of cash flows 2,845,374

 Illustration – Between interest dates (purchase price on March 31, 20x5?)

Illustration 1 Illustration 2
Face amount of bonds 3,000,000 Face amount of bonds 3,000,000
Date of issue Jan. 1, 20x5 Date of issue Jan. 1, 20x5
Nominal rate 8% Nominal rate 6%
Effective rate 6% Effective rate 8%
Semiannual interest Jan. 1 and July 1 Semiannual interest Jan. 1 and July 1
Date of maturity Jan. 1, 20y0 Date of maturity Jan. 1, 20y0
1. The PV of an ordinary annuity of 1 for 10 periods at 1. The PV of an ordinary annuity of 1 for 10 periods at
3% is 8.5302 4% is 8.1109

2. 4% x 3,000,000 = 120,000 nom. > eff. 2. 3% x 3,000,000 = 90,000 nom. < eff.
3% x 3,000,000 = 90,000 4% x 3,000,000 = 120,000
Premium 30,000 Discount 30,000

3. 30,000 x 8.5302 = 255,906 3. 30,000 x 8.1109 = 243,327

4. 3,000,000 + 255,906 = 3,255,906 4. 3,000,000 - 243,327 = 2,756,673

OR (using the effective rate) OR (using the effective rate)

PV of principal 2,232,282 PV of principal 2,026,693

PV of future interest payments 1,023,624 PV of future interest payments 729,981
Total PV of cash flows 3,255,906 Total PV of cash flows 2,756,674

This amount is the PP on Jan. 1, 20x5. To find the PP on This amount is the PP on Jan. 1, 20x5. To find the PP on
March 31, 20x5, it is necessary to prepare a partial table March 31, 20x5, it is necessary to prepare a partial table
of amortization. of amortization.
Date Interest Interest Premium Carrying Date Interest Interest Discount Carrying
received Income Amort. amount received Income Amort. amount
1/1/x5 3,255,906 1/1/x5 2,756,674
7/1/x5 120,000 97,677 22,323 3,233,583 7/1/x5 90,000 110,267 20,267 2,776,941

Carrying amount – Jan. 1, 20x5 3,255,906 Carrying amount – Jan. 1, 20x5 2,756,674
Less: Premium amort. from Jan. – March 11,161 Add: Discount amort. from Jan. – March 10,134
Carrying amount – March 31, 20x5 3,244,745 Carrying amount – March 31, 20x5 2,766,808
Add: Accrued interest from Jan. – March 60,000 Add: Accrued interest from Jan. – March 45,000
Total PP on March 31, 20x5 3,304,745 Total PP on March 31, 20x5 2,811,808

 Illustration – PP of serial bonds

Face amount 6,000,000
Annual installment every Dec. 31 2,000,000
Date of issue Jan. 1, 20x5
Nominal interest rate payable annually every Dec. 31 12%
Effective interest rate 14%

Date Carrying Principal due Interest due Total cash PV of 1 at Total

amount (CA x 12%) flows 14%
Dec. 31, 20x5 6,000,000 2,000,000 720,000 2,720,000 .8772… 2,385,965
Dec. 31, 20x6 4,000,000 2,000,000 480,000 2,480,000 .7695… 1,908,279
Dec. 31, 20x7 2,000,000 2,000,000 240,000 2,240,000 .6750… 1,511,936
Total purchase price 5,806,180