Suppose you observe that the YTM on a 1-year zero-coupon bond is 5%, and the YTM on a 2-year zero-coupon bond is 6%. The YTM on a 2-year annual coupon bond with a 12% coupon rate is 5.8%. Assume all three bonds are riskless. If you were to repackage the 2-year coupon bond as two zero-coupon bonds, how much should you be able to sell them for

Answer and Explanation:

The journal entries are shown below:

On July 1

Prepaid Insurance$24,900  

      To Cash $24,900

(being the prepaid insurance is recorded)

Here prepaid insurance is debited as it increased the assets and cash is credited as it decreased the assets  

On Dec 31

Insurance expense $4,150  ($24,900 ×6 ÷ 36)

        To Prepaid Insurance $4,150

(being insurance expense is recorded)

The insurance expense is debited as it increased the expenses and credited the prepaid insurance as it decreased the assets