Answer:
Premium is $2,677.95
The premium amortization on the 7th payment is $119
Explanation:
In order to arrive at the premium on the bond,it is necessary to compute the issuing price of the bond,which can be done using the pv formula in excel as shown below:
=-pv(rate,nper,pmt,fv)
rate is the semi-annual yield to maturity on the bond which is 6%/2=3%
nper is the number of coupon interest payable by the bond,which is 10 years multiplied by 2=20
pmt is the semi-annual coupon payable by the bond i.e 12%/2*$6000=$360
fv is the face value of the bond which is $6,000
=-pv(3%,20,360,6000)
pv=$8,677.95
premium=issue price -face value
premium=$8,677.95-$6,000
premium=$2,677.95
The premium amortization is the excess of coupon payment over the interest expense.
In the attached, I calculated the premium amortization on the 7th payment.
I started by taking the issue price of $8677.95 ,added interest expense at 3% semi-annually ,deducted the coupon payment of $360,thereby leaving the outstanding balance at end of the year.
Note that the premium amortization is the excess of coupon payment over interest expense as colored coded.
