The first installment on a Bond Anticipation Note is computed by dividing the principal by 1.05.

The first installment on a Bond Anticipation Note is computed by dividing the principal by 1.05.

• A. True
• B. False
• C. It depends
• D. Not applicable

Answer: (B)

Bond Anticipation Notes are short-term borrowings intended to be repaid when the future bonds are issued. The first installment is not found by dividing the principal by 1.05. That division would give the present value of a single future payment discounted at 5%, not the actual amount due as the first installment. If the BAN is to be repaid in one lump sum at maturity, the amount due would be the principal plus interest for the period, i.e., principal multiplied by 1.05 (not divided by 1.05). If there are periodic installments, you’d use standard amortization to allocate interest and principal across installments, rather than using principal divided by 1.05. For example, with a $1,000,000 BAN at 5% for one year and a single maturity payment, the amount due at maturity would be $1,050,000. Dividing $1,000,000 by 1.05 would yield about $952,381, which is the present value of the payment, not the actual first installment. Therefore, the statement is not correct.

Bond Anticipation Notes are short-term borrowings intended to be repaid when the future bonds are issued. The first installment is not found by dividing the principal by 1.05. That division would give the present value of a single future payment discounted at 5%, not the actual amount due as the first installment.

If the BAN is to be repaid in one lump sum at maturity, the amount due would be the principal plus interest for the period, i.e., principal multiplied by 1.05 (not divided by 1.05). If there are periodic installments, you’d use standard amortization to allocate interest and principal across installments, rather than using principal divided by 1.05.

For example, with a $1,000,000 BAN at 5% for one year and a single maturity payment, the amount due at maturity would be $1,050,000. Dividing $1,000,000 by 1.05 would yield about $952,381, which is the present value of the payment, not the actual first installment. Therefore, the statement is not correct.