Quiz: Chapter 8 Quz Time Remaining: 01:27:49 Submit Quiz This Question: 1 pt 21
ID: 2519919 • Letter: Q
Question
Quiz: Chapter 8 Quz Time Remaining: 01:27:49 Submit Quiz This Question: 1 pt 21 of 21 (0 complete) This Quiz: 25 pts possible January 1 2017, bonds th a fa e value o S1 28,000 were sold The bonds mature on January 1 2027. The fa interest ate is 12% annually, he bonds ay interest sem annual on us and anuary. e an etate of teres s annually what is the market price of the bonds? The present value of $1 for 20 periods at 6 s 0.312. The present value of an ordinary annuity of $1 for 20 periods at 6 is 11.47. The present value of $1 or 10 per ods at 10% s 0.463 The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145. (Round your final answer to the nearest dollar.) OA. $128,026. O B. $135,680. OC. $128,000. O D. $106,458. Click to select your answer.Explanation / Answer
Market price of bonds
Present value of all the cash inflows
present value will be calculated with the market interest rate 10% , Because it is the yield of bonds .
so the price will be
present value of all the interest payments + present value of redemption value ( face value here)
Interest payments = $ 128000 * 6% = 7680 semiannually
and $ 128000* 12% = $ 15360 annually
MARKET PRICE OF BONDS
$ 15360 * PVAF (10%, 10 yrs) + $ 128000 * PVIF (10%, 10 years)
= $ 15360* 6.145 + $ 128000* 0.3855
= $ 94387.4 + $ 49349.54
= $ 143736.74
The options did not include correct answer. You can get option A 128026 if you discount cash flows with the rate of 6 % but it will give the face value of bonds and not the market price.
The market price is always determined with market interest rate.
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