Present Value of Bonds Payable; Premium Mason Co. issued $550,000 of five-year,
ID: 2456465 • Letter: P
Question
Present Value of Bonds Payable; Premium
Mason Co. issued $550,000 of five-year, 13% bonds with interest payable semiannually, at a market (effective) interest rate of 12%.
Determine the present value of the bonds payable, using the present value tables in Exhibits 4 and 5. Round to the nearest dollar.
EXHIBIT 4 Present Value of $1 at Compound Interest ANI-No 10% 0.90909 0.82645 13% 11% 0.90090 0.81162 Periods 4% 0.96154 0.956940 0.92456 0.915730 5% 0.95238 0.90703 51/2% 0.94787 0.89845 6% 0.94340 0.89000 7% 0.93458 0.87344 12% 0.89286 0.79719 0.88496 0.78315 0.88900 0.876300 0.86384 0.85161 0.83962 0.81630 0.75 131 0.73119 0.71178 0.69305 0.61332 0.54276 0.79031 0.767900 0.74622 0.72525 0.70496 0.66634 0.56447 0.53464 0.50663 0.48032 0.42506 0.37616 0.33288 0.29459 0.80722 0.76513 0.76290 0.71299 0.68301 0.62092 4 0.85480 0.838560 0.82193 0.802450 0.79209 0.74726 0.65873 0.59345 0.63552 0.56743 0.82270 0.78353 6 0.75992 0.734830 0.73069 0.703190 0.70259 0.672900 0.67556 0.643930 0.71068 0.67684 0.64461 0.61391 0.68744 0.65160 0.61763 0.58543 0.66506 0.62741 0.59190 0.55839 0.62275 0.58201 0.54393 0.50835 0.51316 0.46651 0.42410 0.38554 0.48166 0.43393 0.39092 0.35218 0.45235 0.40388 0.36061 0.32197 8Explanation / Answer
Given interest rate = 550,000*(0.13/2) = $35,750.
Discount rate = 0.12/2 = 0.06
Compute the present value of the bond.
Year Cash OutFlows Discount @6% Present value of cash outflows 0 1 1 35750 0.9433962 33726.41509 2 35750 0.8899964 31817.37273 3 35750 0.8396193 30016.38937 4 35750 0.7920937 28317.34846 5 35750 0.7472582 26714.47968 6 35750 0.7049605 25202.33932 7 35750 0.6650571 23775.79181 8 35750 0.6274124 22429.99228 9 35750 0.5918985 21160.37007 10 35750 0.5583948 19962.61327 10 550000 0.5583948 307117.1273 Present value of the bond 570240.2394