How do you apply the amportised cost model with the irr meth

How do you apply the amportised cost model with the irr method to get the value of the asset. For example how did the 93.54 go from the FV of 99 to being +94.22 on the asset line. Please clarify what steps I could follow to calculate this.

Solution

You can solve the above problem by using the effective interest rate method

1.)First multiply the beginning carrying value of the bond by the effective interest rate (IRR) or the specified bond to arrive at interest expense.

For Eg:- Initial Value ofBond (purchase price) = 93.54

IRR = 5%

Total Value of Bond = 93.54 x 1.05 = 98.22

2.) Then subtract the cash paid based on the coupon rate from the interest rate (IRR) calculated above to arrive at the amortization of the discount.

For Eg:- Par Value ofBond = 100

Coupon Rate = 4%

Net Value of Bond = 98.22 – (100 x .04)

= 98.22 – 4 = 94.22

In the same way you can calculate for next year as follows:

Net Value of Bond = (94.22 x 1.05) – (100 x .04)

= 98.93 – 4 = 94.93