Cox Corporation invested in the bonds of Latif Industries on January 1, 2018. These 10 year, $100,000 bonds pay interest of 6% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

Question

Quizplus · Accepted Answer

The purchase price of the bonds is calculated using the present value of the bond's cash flows, which include the present value of the interest payments and the present value of the principal amount, discounted at the effective interest rate of 4%. The present value of the interest payments ($6,000 annually) and the principal ($100,000) at 4% results in a purchase price of $116,351.

Cox Corporation Invested in the Bonds of Latif Industries on January