Qs 14-5A Computing bond price LO C2 Garcia Company Issues 1200%, 15-year bonds w

Question

Qs 14-5A Computing bond price LO C2 Garcia Company Issues 1200%, 15-year bonds with a par value of $440,000 and semiannual interest payments. On the issue date, the : annual market rate for these bonds is 10.00%, which implies a selling price of 115 13. Confirm that the bonds' selling price is approximately correct. Use present value Table B1 and Table B.3 In Appendix B. (Round all table values to 4 decimal places, and use the rounded table velues in celculetions. Round your other finel answers to nearest whole doller amount.) Par Value - Selling Price x Price 115 1/3 Table Value 507,540 Present Value 440,000 ash Flow 440,000 par (maturity) value $26,400 interest payment Price of Bond Difference due to rounding of table values

Explanation / Answer

The formula to find Price of Bond is : Cupon Amount*PVAF(r,n)+Redemption Amount*PVIF(r,n)

C = coupon payment = $52,800.00 (Par Value * Coupon Rate)

So 1 cupon payment would be $52,800.00/2 =$26400

Number of coupon payments in 1 year = 2 (As compundig is semi annual)

Value at maturity,(Redemption Amount) = $440,000

Calculation is shown below

Difference  $507,638.78 (-) $507,540 = $ 98.78 is due to rounding off as i have taken all decimals into conisderation.

Therefore it can be confirmed that bond's selling price is approximately correct

C = coupon payment = $52,800.00 (Par Value * Coupon Rate)

So 1 cupon payment would be $52,800.00/2 =$26400

Number of coupon payments in 1 year = 2 (As compundig is semi annual)

n = number of years = 15 r = market rate, or required yield = 10.000% = 0.10

Value at maturity,(Redemption Amount) = $440,000

Calculation is shown below

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