On July 1, 2010, Maui Blends issued $2,100,000 of 8-year 13% bonds at an effecti
ID: 2428066 • Letter: O
Question
On July 1, 2010, Maui Blends issued $2,100,000 of 8-year 13% bonds at an effective interest rate of 11%, receiving cash of $2,319,704. Interest on the bonds is paid semi-annually.Compute the price of $2,319,704 received for the bonds by using the tables of present value.
Q: What is the present value of the face amount and the present value of the semi-annual interest payments?
(The online hw says the answer is 891620 and 1428084 but I have no clue how they got this, if someone could help me with this I would greatly appreciate it! thanks,anna)
Explanation / Answer
I am not sure what your background in finance is, but I found the present value of Face Value using this equation: PV = FV / (1+r)^n = 2,100,000 / (1+.11/2)^16 = $891,620 You use 5.5% as the interest rate because interest is paid semi-annually. N is the amount of payments. This is practically the same as using the table, but I am just showing you the finance concept here. Then for the present value of the semi-annual interest payments. One interest payment is the following: $2,100,000*5.5% = $115,500 I am not quite sure how to get to that present value. Then, you have 16 payments
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