Computation of bond market price and Amoritization of premium or discount Lighth

Question

Computation of bond market price and Amoritization of premium or discount

Lighthouse Enterprises decided to issue $700,000 of 10 year bonds. The interest rate on the bonds is stated at 10%, payable semiannually. At the time the bonds were sold, the market rate had increased to 12%.

Intructions:

1. Deteremine the maximum amount an investor should pay for these bonds. (note: Round to the nearest dollar.)

2. Assuming that the amount in (1) is paid, compute the amount at which the bonds would be reported by the investor after being held for one year. Use two recognized methods and give support to the method you prefer. (Note: Round to the nearest dollar)

Explanation / Answer

Solution.

Calculation of maximum amount an investor should pay for these bonds.

Rate of interest = 10%

Market rate = 12%

Compound = Semiannual

Time = 10

1. Present Value of a Bond's Interest Payments

PVOA =$35,000 x PVOA factor for n = 20, i = 6% market interest per semiannual period.

PVOA = $35,000 x 11.46

PVOA = $401,100

2. Present Value of a Bond's Maturity Amount.

PV of 1 = $700,000 x PV for 1 factor for n = 20, i = 6% market interest per semiannual period.

PV of 1 = $700,000 x 0.311

PV of 1 = $217,700

Combining the Present Value of a Bond's Interest and Maturity Amounts.

The present value of the bond in our example is $401,100 +$217,700 = $618,800.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.