A company issues bonds with a par value of $800,000 on their issue date. The bon

Question

A company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in two semiannual payments. On the issue date, the market rate of interest is 8%. Compute the price of the bonds on their issue date. The following information is taken from present value tables: Present value of an annuity for 10 periods at 3% 8.5302 Present value of an annuity for 10 periods at 4% 8.1109 Present value of 1 due in 10 periods at 3% 0.7441 Present value of 1 due in 10 periods at 4% 0.6756

Explanation / Answer

Calculation of Price of the Bonds on Issue date Amount PV of $800,000 due in 10 periods at 4% ($800000 X 0.6756)               540,480 PV of interest payable semiannually at 4% ($24,000 X 8.1109)               194,662 Total price               735,142

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