Bangalore

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Bond Markets: Advanced Perspectives
Part-03B
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Borrowers issue bonds
in the international
market to raise
medium to long term
funds.
Borrowers MNCs,
governments, financial
institutions.
High Net Worth (HNW)
investors use these
markets for risk
diversification
International
Bond Market
Eurobond
segment
Foreign bond
segment
5
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Bonds denominated in one or more
currencies other than the local currency
E.g. Bonds issued in currencies other than the
Yen, which are sold in Japan
The issuer may be a Japanese or a foreign entity
7
Sony is issuing bonds in
Japan:
Issuer = Japanese company
Principal = $10 billion
Currency of issue = USD
Currency of Japan = Yen

IBM is issuing bonds in
Japan:
Issuer = American company
Principal = $10 billion
Currency of issue = USD
Currency of Japan = Yen


8
Bonds are issued in the currency of the
country in which they are sold
But by an agency from a foreign country

9
Sony is issuing bonds in
Japan:
Issuer = Japanese company
Principal = 100 billion
Currency of issue = Yen
Currency of Japan = Yen

IBM is issuing bonds in
Japan:
Issuer = American company
Principal = 100 billion
Currency of issue = Yen
Currency of Japan = Yen


10
Foreign Bond
Not a Foreign Bond
Foreign bonds have nicknames
U.S. Yankee bonds
Japan Samurai bonds
U.K. Bulldog bonds
Australia Kangaroo bonds
Spain Matador Bonds
11
Eurobond market provides a lower yield, yet
has grown faster than the foreign bond market:
1. These bonds are not subject to the regulations of the
country in whose currency they are issued
E.g. to issue US dollar bonds in Japan permission is not
required from U.S. authorities
2. They can be brought to the market quickly and with
less disclosure
Important characteristic when an issuer wants to take
advantage of favorable market conditions
12
3. They are issued in bearer form and offer
favorable tax status by assuring anonymity
The name and address of the holder are not
mentioned on the bond certificates.
In practice this has facilitated tax evasion
and tax avoidance
4. Interest paid on such bonds is not subject to
withholding taxes a.k.a. TDS in India


13
Top quality borrowers
Any global currency
Bearer bonds
Not regulated by sovereign governments
No withholding taxes
Annual coupons for fixed rate bonds
Semi-annual/quarterly coupons for Floating-rate
notes
Listed on London/Luxembourg
Unsecured
Bullet principal repayment
Book-entry settlement via
Euroclear/Clearstream
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Euro straights pay fixed annual coupons on a
30/360 basis
US bonds pay semi-annually
If the US yield is r% per annum and the
Eurobond yield is y% per annum
(1+y) = (1 + r/2)
2
y = r (1 + r/4)
r = 2[(1+y)
1/2
1]
8/28/2014 15
Many eurobonds have attached warrants
Debt warrants allow holders to buy additional
debt at a fixed price
These are interest rate call options
They appeal to investors who expect rate
declines
They allow holders to buy additional bonds with
the same maturity at lower coupons
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Some bonds have currency and commodity
warrants
Currency warrants permit holders to exchange
one currency for another at a preset rate
It protects the holder against a depreciation in
the currency in which cash flows are
denominated
Commodity warrants allow holders to buy a
commodity at a fixed price
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Dual currency bonds pay interest in one
currency and principal in another
They are a portfolio of an annuity in one
currency and a ZCB in another
Exchange rate may be specified at the time of
issuance
Otherwise it will be the prevailing rate at the
time of payment
Streaker bonds are ZCBs
Global bonds are a hybrid of Eurobonds and
foreign bonds
World Bank placed 10 year USD notes in the US
and other markets simultaneously
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In a falling interest rate environment
Investors prefer fixed rate bonds
Issuers prefer FRNs
In a rising interest rate environment
Investors prefer FRNs
Issuers prefer fixed rate bonds
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Perpetual FRNs have no maturity date
Collared floaters have a cap and a floor
The floor is usually set higher than the
prevailing interest rate
To attract investors
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Yields on FRNs are usually not quoted as
absolute values
Rather they are quoted as a spread in
relation to a benchmark such as LIBOR or
LIBID
Example
LIBOR + 40 b.p.
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If a T-Bond is issued on one of the standard
semi-annual dates it will pay a full coupon
every 6 months
Otherwise the first coupon may be more or
less than the subsequent full coupons
Such bonds are said to have an odd first coupon
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If the first coupon is less than a full coupon
It is termed as a Short First Coupon
If the first coupon is more than a full coupon
It is termed as a Long First Coupon
Short first coupons typically occur when the
usual issue date falls on a weekend/holiday
And consequently the bond is issued on the
subsequent first business day

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Odd first coupons pose computational issues
from the standpoint of
Accrued Interest
Cash flows
YTM
These issues however do not exist after the
first coupon
Remaining coupons are full coupons
Payable on the scheduled semi-annual days
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There is a 9.5% 2 year T-note
The scheduled issue date is April 30, 20XX
The actual issue date is May 2, 20XX
Because 30 April is a Saturday
The coupon dates are 30 April and 31 October
T-notes entail the use of the Actual/Actual
day-count convention
April 30 to October 31 is 184 days
May 2 to October 31 is 182 days
Thus the first coupon is 4.75% x 182/184 =
4.6984%

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There are two issues while calculating the AI
for a settlement date falling in the first
coupon period
The first coupon is not a FULL coupon
The maximum accrual period is shorter than 6
months
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Assume that the settlement date is 15 June
The number of days since the issue date is 44
The actual length of the coupon period is 182
Thus the AI is 4.6984 x 44/182 = 1.1359%
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The fraction of a period that is remaining is
computed as follows.
The numerator is the number of days from the
settlement date to the next coupon date
In this case it is 138
The denominator is the number of days from the
semi-annual scheduled issue date and the next
coupon date
In this case it will be 184
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We will use the standard bond pricing
equation with two differences
The magnitude of the first coupon will be less
than the magnitude of subsequent coupons
The beginning of the interval for calculating the
fractional first period predates the actual issue
date
In the standard pricing equation it will be the
actual issue date
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Let us assume that the YTM is 8% per annum.
The fractional first period is 138/184 = 0.75
Assume that the face value is 1,000
The first coupon will be 0.046984 x 1,000 =
46.984
Subsequent coupons will be 47.50
On October 31 there will be 3 full coupons
and the face value remaining
The PV is 1020.8132
The coupon received on that day is 46.984
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The dirty price is
(1020.8132 + 46.984)/(1.04)
0.75
= 1036.8448

The accrued interest is $ 11.359
The clean price is 1025.4858
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A bond is issued on September 30 20XX
It matures on 15 November 20XX+10
The scheduled coupon dates are May 15 and
November 15
The first semi-annual coupon date is 15
November 20XX
In this case no interest is payable on that date
The first coupon will be paid on 20XX + 1
The coupon rate is 9.5% per annum
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For the interval from 15 November 20XX to
15 May 20XX+1 a full coupon will be paid
This amounts to 4.75% in this case
In addition a partial coupon is payable for
the period 30 September to 15 November
15 May 20XX to 15 November 20XX is 184
30 September to 15 November is 46 days
46/184 = 0.25
0.25 x 4.75 = 1.1875
Thus the total first coupon = 4.75 + 1.1875 =
5.9375%
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There are two separate parts to the time
between the issue date and the first coupon
date
There is a short period from the issue date till
the first semi-annual anniversary date
And a long period from the first semi-annual
anniversary date to the second semi-annual
anniversary date
Which is the date on which the actual coupon is paid
We need to distinguish between these two
periods while computing accrued interest
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Assume that the settlement date is 23
October 20XX
Accrued interest is computed using the
partial coupon component of the first coupon
30 September till 23 October is 23 days.
30 September till 15 November is 46 days
Accrued interest = (23/46) x 1.1875 =
0.59375%
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Assume the settlement date is 15 January
20XX+1
15 November till 15 May is 181 days
15 November till 15 January is 61 days
Accrued interest as on 15 January 20XX+1
= 1.1875% + (61/181) x 4.75% = 2.7883%

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The price yield computation depends on
whether the valuation date lies
In the short period preceding the first coupon
payment
Or in the long period preceding the first coupon
In the first case the first cash flow will be
received more than six months later
In the second case it will be received less
than six months later
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Assume the valuation date is 23 October
20XX
The first semi-annual anniversary date is 15
November 20XX
May 15 till November 15 is 184 days.
23 October till 15 November is 23 days
Thus the first coupon will be paid after 1+
23/184 = 1.125 periods
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On 15 May 20XX+1, a bond with a face value
of $1,000 will pay a coupon of 5.9375% or
$59.375
On this date there will be 19 coupons left
and a terminal face value of $1,000
Each of these coupons will be $47.50
The present value of cash flows on this date
is 59.375 + 47.50xPVIFA(0.04,19) +
1000PVIF(.04,19) = 59.375 + 1,098.5045 =
$1,157.8795
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The present value on 23 October is
1157.8795/(1.04)
1.125
= $1107.9008
This is the dirty price
The clean price is 1107.9008
0.0059375x1000 = 1101.9633


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Assume that we are on 15 January 20XX+1
The fractional period till the first coupon is
120/181 = 0.6630
The PV of all cash flows on 15 May 20XX+1 is
$1,157.8795
The PV on 15 JAN is 1157.8795/(1.04)
0.663
= 1128.1589
This is the dirty price
The clean price is 1128.1589 0.027883 x 1,000 =
1,100.2759
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Assume we are on 1 FEB 2014
Settlement will happen on 2 FEB 2014
A T-note maturing on 15 NOV 2023 is trading
at 97-08
The coupon is 5.40%
The dirty price is
97 + (8/32) + 2.7 x 79/181 = 98.4285

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On 15 FEB 2014 the Treasury will reopen the
issue
The trader can borrow on a collateralized
basis at 3.50% per annum.
Amount borrowed = 98.4285
Amount repayable = 98.4285 x [1 + 0.035 x
13/360] = 98.5529
To breakeven the newly issued security must
be sold for this amount
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Accrued interest on 15 FEB = 2.7 x 92/181 =
1.3724
Clean price corresponding to 98.5529 is
98.5529 - 1.3724 = 97.1805
YTM corresponding to the price on FEB 1 is
5.7705
The YTM corresponding to the price on 15
FEB is 5.7812
Thus the break-even on the roll is 578.12-
577.05 = 1.07 basis points

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There are two types of issues
P-Linkers and C-Linkers
In the case of P-Linkers
The coupon rate is fixed
The principal is linked to changes in an Index like
the CPI
Such bonds are usually issued by governments
TIPS (Treasury Inflation-Protected Securities)
are an example

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C-Linkers are like floating rate bonds
The principal is fixed
The coupons are variable and are linked to the
CPI
They are usually issued by commercial banks and
insurance companies
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Face value = $100
Coupon rate = 5%
Payment frequency = annual
Maturity = 5 years

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Time CPI INF.Rate Adj.Prin Nominal
Cash
Flow
Real
Value
0 100 100.00 -100.000 -100.000
1 108 8% 108.00 5.400 5.00
2 117.5 8.7963% 117.50 5.875 5.00
3 112.50 -4.2553% 112.50 5.625 5.00
4 120 6.6667% 120.00 6.000 5.00
5 130 8.3333% 130.00 136.500 105.00
Average 6.5082% IRR 10.6814% 5.00%
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If the previous issue were to be a C-Linker
the coupon every period will be the
announced rate plus the rate of inflation
In this case the announced rate is 5%
So if the rate of inflation is 3%
The actual coupon paid will be 8%
8/28/2014 49
Time CPI INF.Rate Coupon
Rate
Nominal
Cash
Flow
Real
Value
0 100 -100.000 -100.000
1 108 8% 13.0000% 13.0000 12.0370
2 117.5 8.7963% 13.7963% 13.7963 11.7415
3 112.50 -4.2553% 0.7447% 0.7447 0.6620
4 120 6.6667% 11.6667% 11.6667 9.7223
5 130 8.3333% 13.3333% 113.3333 87.1795
Average 6.5082% IRR 10.5630 4.7423%
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Cash flows on the C-Linker are more front
loaded- as compared to the P-Linker
Compensation for inflation on the C-Linker is
paid on realization
It is mostly deferred till maturity on the P-Linker
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This is used for bonds which have a sinking
fund provision.
A firm has issued bonds with a total face
value of $200 MM
The bonds have 5 years to maturity.
Coupons are paid on an annual basis at a rate
of 6% per annum
The company will redeem a fraction of the
issue every year as per the following
schedule
8/28/2014 52
YEAR (t) Proportion
Redeemed (w)
Redemption Price
(P)
1 0.10 102.00
2 0.15 101.50
3 0.20 101.00
4 0.20 100.50
5 0.35 100.00
8/28/2014 53
The average life is defined as:
(w x P x t) (w x P)
The numerator is
0.10x102x1 + 0.15 x101.50x2 + 0.20x101x3 +
0.20x100.50x4 + 0.35x100x5 = 356.65
The denominator is
0.10x102 + 0.15 x101.50 + 0.20x101 +
0.20x100.50 + 0.35x100 = 100.725
The average life is 356.65 100.725 = 3.5408
years




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The yield to average life is computed under
the assumption
That the bond matures at the time corresponding
to the average life
And that the cash flow at that time is the
average redemption price
Assume that the prevailing market price is
98.25
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Where N -1 is the number of coupons received at regular intervals
prior to the time corresponding to the average life

M is the average redemption price

N* is the time corresponding to the average life

Y
al
is the yield to average life
In our illustration
N-1 = 3
N* = 3.5408
M = 100.725
P = 98.25
The solution is 7.4892%
The YTM is 6.4202%
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The bond is trading at a discount
The redemption schedule has the effect of
reducing the time interval over which the
capital gain arises
Thus the yield gets pushed up
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In this measure we consider the present
value of the redemption price instead of the
price itself
This accounts for the fact that the redemption
prices are received at different points in time

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The formula for the equivalent life is given
by:

In this case the present values are defined
using the yield to equivalent life
Hence we need to compute the yield to
equivalent life before we can compute the
equivalent life
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The yield to equivalent life is defined as:

Where N is the number of remaining coupon periods

w
i
is the proportion redeemed at time i

P
i
is the redemption price corresponding to time i

y
el
is the yield to equivalent life
In our example:
N = 5
C = 6
P = 98.25
The yield to equivalent life comes to 8.9471%
The YTM is 6.4202%
The equivalent life is 3.3782 years
The equivalent life will always be shorter
than the average life since in the former,
earlier cash flows get greater weight


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The yield to equivalent life is higher than the
yield to average life
8/28/2014 64
When a corporation decides to issue bonds it
must submit the required documents to the
regulator
For authorization to borrow
The authorization per se need not be
recorded in the books of account
However it is usually disclosed in the footnotes

The footnote will mention the number and
value of bonds authorized.
As well as the interest rate, the interest
payment dates, and the life of the bond
Assume that Alpha corporation issues a JD-15
bond on 15 June 2014
The face value is $1,000 and the coupon is
8% per annum payable semi-annually
Assume that 1,000 bonds are issued at par
and that the maturity is 4 years.
Debit Amount Amount Credit
Cash 1,000,000 1,000,000 Bonds Payable
Cash which is an asset will be debited by
1,000,000 as there is an inflow

Bonds payable will be credited with
1,000,000 as there is a liability
On 15 December 2014 there will be an
interest payable
In this case 1,000,000 x 0.08/2 = 40,000
Bond interest expenses will be debited by
40,000
If the amount is immediately paid out then
cash will be credited with 40,000
If the amount is not paid out immediately
Interest Payable will be credited with 40,000

Consider the same bond.
The coupon is 8%, however the YTM at the
time of issue is 8.50%
The issue price will be 983.34
The total inflow from 1,000 bonds is 983,340
Cash will be debited with 983,340
Bonds payable will be credited with 1,000,000
Unamortized bond discount will be debited with
16,660
Unamortized bond discount is a contra-
liability account
The balance in this account is deducted from
the face value to arrive at the present value
It will be amortized or written off during the
life of the bonds
Consider the same data
Assume the YTM at the time of issue is 7.50%
The issue price per bond will be 1017.01
The total inflow will be 1,017,010
It will be reflected in the books as follows
Cash will be debited with 1,017,010
Bonds payable will be credited with 1,000,000
Unamortized bond premium will be credited with
17,010
Issue costs for a bond issue can be significant
These have benefits for the entire life of the
bond
Consequently they need to be spread out
The net result of incurring such costs will be
To reduce the proceeds from an issue at par
To increase the discount for an issue below par
To decrease the premium for an issue above par
Thus such expenses can be amortized over
the life of the bond by way of amortizing the
discount/premium
The discount should be amortized over the
life of the issue
Thus the discount will gradually decline over
time and the carrying value will steadily
increase
The carrying value is the
Face Value Unamortized Discount
At maturity the carrying value will be equal
to the face value
And the unamortized discount will be zero
If a bond is issued at a discount the effective
interest paid by the issuer is greater than the
coupon rate
This is because the effective interest paid is
the sum of the coupons plus the discount
The company does not receive the full face value
at the time of issue
Yet it must pay back the face value at maturity
Thus the discount must be added to the total
interest payments to arrive at the effective
interest
In our case the total coupon payment is
40,000 x 8 = 320,000
The discount = 16,660
Thus the total interest cost is 336,660

The discount is allocated over the life of the
bond as an increase in the interest paid
Thus the interest expense for a period will
exceed the actual interest by the amount of
the amortized discount
This process of allocation is called the
Amortization of Bond Discount
It equalizes amortization of the discount for
each interest period.
Our bond pays interest on June-15 and
December-15 every year for 4 years
Thus there are total of 8 coupon periods
The amortized bond discount per period =
336,660/8 = 42,082.50
Cash interest paid = 40,000 per period
Interest Expense per period = 42,082.50
Debit Bond Interest Expense with 42,082.50
Credit Cash with 40,000
Credit unamortized bond discount with
2,082.50

The debit balance of unamortized bond
discount is reduced by 2,082.50 every period
Thus the carrying value of the bonds
increases by this amount every period
Similar entries will be made every six months
At maturity the unamortized bond discount
will have a zero balance
The carrying value will be 1,000,000
Exactly what is owed to the bondholders

The method has certain weaknesses
When amortizing a discount the carrying
value goes up every period but the interest
expense is constant
Thus the rate of interest falls over time
Obviously if a premium were to be amortized
The rate of interest will rise over time
In this method a constant interest rate is
applied to the carrying value of the bond at
the beginning of the period
This rate is the YTM prevailing at the time of
issue
The amount amortized each period is the
difference between the interest computed
using the YTM and the actual interest paid
Let us consider the data we have for the
discount bond.
The issue proceeds were 983,340 and the
YTM was 8.50%
The discount is 16,660 and the initial
carrying value is 983,340
The interest expense for the first quarter will
be 983,340 x 0.085/2 = 41,791.95
The actual interest paid is 40,000
Thus the amortized discount is 41,791.95
40,000 = 1,791.95
The unamortized bond discount at the end of
the period is 16,660 1,791.95
This will decrease every period
The carrying value will increase every period
Thus the amortized discount will steadily
increase
So the entries at the end of the first period
will be:
Debit Interest Expense by 41,791.95
Credit cash with 40,000
Credit Unamortized Bond Discount by
1,791.95
PERIOD Beginnin
g
Carrying
Value
Interest
Expense
Coupon Amortize
d
Discount
Unamort
i-zed
Bond
Discount
Ending
Carrying
Value
0 16,660 983,340
1 983,340 41791.95 40,000 1,791.95 14,868 985,132
2 985132 41868.11 40,000 1,868.11 13000 987,000
3 987000 41947.50 40,000 1947.50 11052 988948
4 988948 42030.27 40,000 2030.27 9022 990978
5 990978 42116.56 40,000 2116.56 6906 993094
6 993094 42206.51 40,000 2206.51 4699 995301
7 995301 42300.29 40,000 2300.29 2399 997601
8 997601 42398.05 40,000 2398.05 1 999,999
The carrying value gradually increases and
approaches the face value at maturity
The interest expense is a fixed percentage of
the carrying value
Consequently it increases every period
Since the coupon payments are constant the
amortized discount steadily increases
Let us consider the situation where the
coupon is 8% per annum and the YTM is 7.50%
The initial inflow was 1,017,010
Thus there is an unamortized bond premium
of 17,010
Like a discount, the premium needs to be
amortized over the life of the bonds

The premium represents an amount that the
bondholders will not receive at maturity
It is an advance reduction of the total
interest paid over the life of the bond.
The total coupon = 40,000 x 8 = 320,000
The bond premium is 17,010
Thus the total interest cost is 302,990
Now let us consider amortization of the
premium
The bond premium is evenly spread over the
life of the bond
The per period amortized amount of the
premium = 17,010 8 = 2,126.25
Coupon per period = 40,000
Hence interest expense per period = 40,000
2,126.25 = 37,873.75
Debit Interest Expense with 37,873.75
Credit cash with 40,000
Debit unamortized bond premium with
2126.25
The interest expense is less than what
bondholders receive
The difference is debited to the Unamortized
Bond Premium
This lowers the credit balance for the
unamortized bond premium
It also reduces the carrying value of the bond
by the same amount
Similar entries will be made every six months
When the bond matures the balance in the
unamortized bond premium account will be
zero
The carrying value will be equal to the face
value
In this case the initial YTM is applied to the
carrying value at the outset.
Since the carrying value will steadily decline
so will the interest expense
The unamortized bond premium declines
gradually and approaches zero
The amount of premium amortized in a
period is equal to the coupon minus the
interest expense
Since the expense is gradually declining the
amount amortized will steadily increase
TIME Beginning
Carrying
Value
Interest
Expense
Coupon Amortized
Premium
Unamorti-
zed
Premium
Ending
Carrying
Value
0 17,010 1,017,010
1 1,017,010 38137.88 40000 1862.13 15,148 1,015,148
2 1,015,148 38068.05 40000 1931.96 13,216 1,013,216
3 1,013,216 37995.60 40000 2004.40 11,212 1,011,212
4 1,011,212 37920.43 40000 2079.57 9,132 1,009,132
5 1,009,132 37842.45 40000 2157.55 6,974 1,006,974
6 1,006,974 37761.54 40000 2238.46 4,736 1,004,736
7 1,004,736 37677.60 40000 2322.40 2,414 1,002,414
8 1,002,414 37590.51 40000 2409.49 4 1,000,004
Consider the bond that was issued at a
premium
Assume that the bonds can be recalled at
1,080
- Face value plus one years coupon
Let us assume that the bond is recalled after
5 coupon periods
The unamortized premium will be 6,974

The accounting entries will be as follows
Debit bonds payable with 1,000,000
Debit unamortized bond premium with 6,974
Debit loss on retirement with 73,026
Credit cash with 1,080,000
Sometimes a rise in interest rates may cause
the market price of the bond to fall way
below the face value
In such cases the issuer may enter the
market and buy back bonds
In this case a gain will be realized for the
difference between the repurchase price and
the carrying value
Assume that the bond which was issued at a
premium is bought back after 5 coupon
periods at 950
The entries will be as follows
Debit bonds payable with 1,000,000
Debit unamortized bond premium with 6,974
Credit cash with 950,000
Credit gain on retirement of bonds with
56,974
If a bond holder decides to convert the
company will record the common stock
issued at the carrying cost of the bonds
The bond liability and the unamortized
premium or discount are written off
Thus there is no recorded gain or loss
Let us consider the case of the bond issued
at a premium
After 5 periods the carrying value is
1,006,974
Let us assume that bond holders convert to
40 shares with a par value of 20 each.
The entries will be as follows
Debit bonds payable by 1,000,000
Debit unamortized bond premium by 6,974
Credit common stock with 800,000
Credit additional paid in capital with 206,974
Bonds are often issued at a date
corresponding to a coupon date
At times however they may be issued
between two semi-annual coupon dates
In these cases they usually collect from the
investors the interest that would have
accrued for the partial period
And payout the interest for the entire period on
the next coupon date
If a company issues bonds over several days
and does not collect accrued interest
Then records will have to be maintained for each
bondholder and date of purchase
Thus for purchasers corresponding to each
coupon date the coupon would have to be
computed differently
This will entail major bookkeeping costs
Assume that a bond with a face value of
1,000 and a coupon of 8% payable semi-
annually is issued 1 months after the
corresponding semi-annual coupon date
The accrued interest will be 10
Thus for each bond 1,010 will be collected
which would amount to 1,010,000 in all
This would be accounted for as follows
Debit cash with 1,010,000
Credit Interest Expense with 10,000
Credit bonds payable with 1,000,000
On the next coupon date the following
entries will be made
Debit bond interest expense with 40,000
Credit cash with 40,000

The semi-annual coupon dates will usually
not correspond with the ending date for the
financial year
Thus there is a need to accrue interest from
the last coupon date to the end of the year
Also any discount or premium must be
amortized for the partial period

Consider the bonds that were issued at a
premium on June 15, 2014 at a premium
The next coupon would be paid on 15
December 2014
Thus on 31 March 2015, we need to provide
for
Accrued interest for 3 months or 7/12 of a
period
And for 7/12 of the amortized premium
corresponding to the second coupon period which
is 1931.96
Thus the following entries would be passed
on 31 March 2015
Debit interest expense with 22,206.35
Debit unamortized bond premium with 1,126.98
Credit interest payable with 23,333,33
On June-15 2015 the following entries will be
passed
Debit bond interest expense with 15,861.70
Debit unamortized premium with 804.98
Debit bond interest payable with 16,666.67
Credit cash with 40,000