Use the present value and future value tables included in Appendix 8 and on the textbook companion website.
-If the market rate of interest is 12 percent and a company is issuing long-term bonds paying 10 percent, at what percent would those liabilities have to be discounted, assuming semiannual compounding?

Question

Use the present value and future value tables included in Appendix 8 and on the textbook companion website. 
-If the market rate of interest is 12 percent and a company is issuing long-term bonds paying 10 percent, at what percent would those liabilities have to be discounted, assuming semiannual compounding?

Quizplus · Accepted Answer

To find the discount rate, we need to use the present value of an annuity factor. Using Appendix 8, with a 10-year term and semiannual compounding, the present value of an annuity factor at 10% is 7.72173. Then, dividing 12% by 2 to account for semiannual compounding gives a periodic interest rate of 6%. Using the present value of an annuity factor table and a 10-year term with semiannual compounding, the present value of an annuity factor at 6% is 7.72173. Therefore, the liabilities would have to be discounted at a rate of 6% to have a present value at issuance equal to their face amount.

Use the Present Value and Future Value Tables Included in Appendix