Amiga Inc issued $100,000,7% semi-annual,5-year bonds.The market rate at the time of issue was 7.5%.Using the effective interest method,the present value of the bond is

Question

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To calculate the present value of the bond using the effective interest method, we first calculate the semi-annual interest payment by taking 7% of the face value ($100,000) and dividing by 2. This gives us an interest payment of $3,500 every 6 months.

Next, we calculate the present value factor using the market rate of 7.5%. This can be found using a financial calculator or present value tables, and it comes out to be 0.98039.

We then multiply the semi-annual interest payment by the present value factor to get the present value of each semi-annual interest payment. In this case, that would be $3,500 x 0.98039 = $3,431.37.

We repeat this process for each of the 10 semi-annual interest payments over the 5-year term of the bond, and add up all of the present values to get the total present value of the bond.

When we do this calculation, we get a present value of $97,945. This is the closest answer choice to our calculation, so choice (A) is the best answer.

Amiga Inc Issued $100,000,7% Semi-Annual,5-Year Bonds