$8 million, 6%, 10-year bonds are issued at less than face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value of
A) $480,000 received for 10 periods must be calculated.
B) $240,000 received for 10 periods must be calculated.
C) $240,000 received for 20 periods must be calculated.
D) $480,000 received for 20 periods must be calculated.

Question

Quizplus · Accepted Answer

The bonds pay interest semi-annually, so the annual interest of $480,000 (6% of $8 million) is split into two payments of $240,000 each. Since the bonds have a 10-year term with semi-annual payments, there are 20 periods. Therefore, the present value of $240,000 received for 20 periods must be calculated.

$8 Million, 6%, 10-Year Bonds Are Issued at Less Than