Use the following information to answer the nest four A S100,000 bond bond sh.er
ID: 2516627 • Letter: U
Question
Use the following information to answer the nest four A S100,000 bond bond sh.ery six months questions was issued on 1/1/10. It pays interest (coupon) oL6% per annum, with payments worth on the day of issue, if the prevailing rate for similar bonds (market rate) was 8%. d should be whe bond is due in 2 years. A potential investor wanted to know what the accountant attempted to calculate what the bond should be worth on 1/1 the work of the accountant, and answer the questions below pertainingt t value ?0900 | 890 /2:49 ent) Periods of interest Interest factor 4000 4000 4000 4000 1.0300 1.0609 1.0927 1.1255 1.0609 3,661 94,260 TOTAL 21. The $4,000 figures entered in the first column A. Are correct B. Should be $3,000 C. Should be $6,000 (D be $8,0001 22. The entries in the Period of Interest column A. Are correct Should be 0, 1, 2, 3, 4 hould be 1, 2, 3, 4,4 Should be 1, 2, 3, 4, 5 E. Should be 1, 2,3, 4,6 2,000 8,000 00,.000 in the Interest Factor Column for the first.payment 23. The calc A. Is correct (B. Should be 1.0400 C. Should be 1.0600 D. Should be 1.0800 1+4%)- 24. The calculation in the PV Column for the first payment A. Is correct B. Should be 2,885 C. Should be 2,912 D be 3,846 K,000 Y PVOA 316)Explanation / Answer
First of all we will find the correct price on the date of issue
The price of bond is present value of all cash inflows ie interest and redemption amount
So here the price is
Interest = $ 100000* 3% = $ 3000 half yearly
Yield is 8/2 ie 4 % half yearly
So correct price is = 3000 *PVAF(4%, 4 payments) + $ 100000 * PVIF (4%, 4)
= $ 3000* 3.629895 + $ 100000 * 0.8548
= $ 10889.695 + 85480.42
= $ 96370.105
1. The $ 4000 in first column will be $ 3000 ie interest payments for half year.
2. The entries in Period of Interest column will be
1 , 2, 3, 4, 4
3. The PV/ interest factor for 1 st payment @ 4% is 1.0400.
4. The calculation in PV column for first payment is $ 3000/ 1.0400 or $ 3000* 0.961538 = $ 2884.61