Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:
-The present value of the principal is
A) $2,136,000.
B) $2,160,000.
C) $2,492,000.
D) $2,508,000.

Question

Use the following information for questions 60 through 62:
On January 1, 2014, Ellison Co. issued eight-year bonds with a face value of $4,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: 
-The present value of the principal is
A) $2,136,000. 
B) $2,160,000. 
C) $2,492,000. 
D) $2,508,000.

Quizplus · Accepted Answer

To calculate the present value of the principal, we need to use the present value formula for a bond:
PV = FV/(1+r)^n
PV = 4,000,000/(1+0.04)^16 (since the bond has 8 years or 16 semiannual periods remaining and the semiannual interest rate is 4%)
PV = 4,000,000/2.183 (using the present value of an annuity factor from the table)
PV = $1,828,128.77
Since the bond has a face value of $4,000,000, the present value of the principal is the difference between the face value and the present value of the interest payments:
PV of principal = $4,000,000 - $1,828,128.77
PV of principal = $2,171,871.23, which is closest to choice A ($2,136,000). Therefore, A is the best choice.

Use the Following Information for Questions 60 Through 62