Why did they choose to compute price value with 9% which is the market intrest r

Question

Why did they choose to compute price value with 9% which is the market intrest rate indtead of 8% the bond intrast rate ? because inthe book they computet with bond intrest rate not the market rate

Step 1 of 5 Corporation C issued $750,000, 8 percent bonds on January 1, 2014, when the market interest rate was 9 percent. Since the market interest rate is higher than the coupon rate, the bonds would have been issued at a discount. Issue price of the bonds should be computed by adding the present value of the cash interest to be paid over the life of the bonds and the present value of the principal amount to be repaid to bondholders at maturity Comment Step 2 of 5 Compute the issue price of the bonds. Present value of cash interest paid over the life of the bonds Issue price +Present value of principal repaid at maturity -660, 000x PVIFA (9%,10] +[S750,000x PVIF(9%,10] = ($60,000x 6.41 766)-($750,000 x 0.42241) = $701, 867

Explanation / Answer

When the bonds are issued at a coupon rate which is different from the market rate, then the market rate is used to calculate the present value of bonds. The present value is the price at which a bond sells for in the market today, which is the sum of all future cash flows, discounted in value at market rate

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

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