On January 1, a company issues bonds with a par value of $300,000. The bonds mat
ID: 2388211 • Letter: O
Question
On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:Present Value of an annuity for 10 periods at 4%.......8.1109
Present value of an annuity for 10 periods at 5%.......7.7217
Present value of 1 for 10 periods at 4%.................0.6756
Present value of 1 for 10 periods at 5%.................0.6139
Explanation / Answer
The cash flow you will receive (10 terms of $12,000 = 4% x $300,000 and the capital payment of $300,000) has to be discounted by 6% a year, then added up. For instance, the interest after 3 years is discounted by 1.06^3 and it's present value is only $10,075. Here is a table year: payment: DCF: 0,5 12000 11,655.43 1,0 12000 11,320.75 1,5 12000 10,995.69 2,0 12000 10,679.96 2,5 12000 10,373.29 3,0 12000 10,075.43 3,5 12000 9,786.12 4,0 12000 9,505.12 4,5 12000 9,232.19 5,0 12000 8,967.1 5,0 300000 224,177.45 Sum of values in the last column: $326,768.54