On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity for 10 periods at $ 3 \% $$\quad $$\quad $$\quad $8.5302
Present value of an annuity for 10 periods at $ 4 \% $$\quad $$\quad $$\quad $8. 1109
Present value of 1 due in 10 periods at $ 3 \% $$\quad $$\quad $$\quad $$\quad $$\quad $0.7441
Present value of 1 due in 10 periods at $ 4 \% $$\quad $$\quad $$\quad $$\quad $$\quad $0.6756 What is the issue (selling) price of the bond?

Question

On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity for 10 periods at $ 3 \% $$\quad $$\quad $$\quad $8.5302
Present value of an annuity for 10 periods at $ 4 \% $$\quad $$\quad $$\quad $8. 1109
Present value of 1 due in 10 periods at $ 3 \% $$\quad $$\quad $$\quad $$\quad $$\quad $0.7441
Present value of 1 due in 10 periods at $ 4 \% $$\quad $$\quad $$\quad $$\quad $$\quad $0.6756  What is the issue (selling) price of the bond?

Quizplus · Accepted Answer

The bond's selling price is calculated by finding the present value of the interest payments and the principal. The semiannual market rate is 3% (6% annual rate divided by 2), and the bond pays $12,000 every six months (8% of $300,000 divided by 2). The present value of the annuity (interest payments) is $12,000 * 8.5302 = $102,362.4. The present value of the principal is $300,000 * 0.7441 = $223,230. Adding these gives $325,592.4, which rounds to $325,592.

On January 1, a Company Issues 8%, 5-Year, $300,000 Bonds 3% 3 \% 3%

On January 1, a Company Issues 8%, 5-Year, $300,000 Bonds $3 \%$