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Video instructions and help with filling out and completing Acquisition premium amortization

Instructions and Help about Acquisition premium amortization

Okay class I just did a video on the effective interest rate calculator use under the example of a discount now we're gonna do the same thing but in this case it's gonna be at a premium instead of a discount all right so my example is going to be the same we've got bonds a hundred thousand dollars worth of bonds at this corporation that's going to be selling okay these bonds are four-year bonds they're gonna pay interest annually and the contract rate is 10 percent once again the contract rate can also be called the the coupon rate the stated rate or the discount rate or the not the discount rate or the nominal rate the coupon stated or nominal rate I'm gonna call it the contract rate because that's what my textbook uses the market rate right now is 8 percent so when the contract rate is 10 percent but a bond at this risk level would normally sell at 8 percent then this bonds gonna sell at a premium okay because it's paying on interest at a higher rate so it's gonna sell above the $100,000 okay but we're gonna see that really these investors are willing gonna earn 8 percent and not 10 percent on these bonds okay so let's let's do this time line again let's value what these bonds are gonna sell for so first of all we've got to look at the cash flows the cash flows are the interest and then what it's going to pay out at the end the hundred thousand dollars so the interest is calculated by taking the contract rate or you may be using coupon standard or nominal rate taking this contract rate of 10% times 100,000 so the corporation will pay out $10,000 cash every year for four years that's what my timeline is doing here 1 year 2 year 3 or 4 and then it will also pay back the full bond amount of a hundred thousand at the end so this this right here is my cash flow so let's calculate what this is worth today year zero okay the the annuity this is an annuity $10,000 it's for payments equal time periods apart so equal amounts equal time periods apart is an annuity so we'll go to our tables it's the present value of an annuity president value of an annuity the interest rate will be the 8% because that's what this is gonna earn it's gonna sell it the 8% amount even though it's paying out at 10% is paying cash wise 10% people are only going to earn 8% on this so we're going to use interest at 8 and then the n number of periods is going to be 4 periods okay so when we go to the table our present value of annuity table it's going to be three point three one to one so that's three point three one two one so then times 10,000.

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