On January 1, 2017, bonds with a face value of $94,000 were sold. The bonds mature on January 1, 2027. The face interest rate is 8% annually. The bonds pay interest semiannually on July 1 and January 1. The market rate of interest is 10% annually. What is the market price of the bonds? The present value of $1 for 20 periods at 5% is 0.377. The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462. The present value of $1 for 10 periods at 10% is 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.)

Question

Quizplus · Accepted Answer

The market price of the bonds is calculated using the present value of the interest payments and the present value of the face value at maturity, both discounted at the market rate of interest. The semiannual interest payment is $3,760 ($94,000 * 8% / 2). Using the present value of an ordinary annuity for 20 periods at 5% (since the market rate is 10% annually, or 5% semiannually), the present value of interest payments is $46,834.72 ($3,760 * 12.462). The present value of the face value is $35,460 ($94,000 * 0.377). Adding these gives a market price of approximately $82,295.

On January 1, 2017, Bonds with a Face Value of $94,000