On January 1, a company issues 8%. 8 year, $500,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 10%. The following information is taken from present value tables: What is the issue (selling) price of the bond, rounded to the nearest whole dollar?

Question

On January 1, a company issues 8%. 8 year, $500,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 10%. The following information is taken from present value tables:  What is the issue (selling) price of the bond, rounded to the nearest whole dollar?

Quizplus · Accepted Answer

To calculate the issue price using present value tables, we need to find the present value of the bond's future cash flows, which include semiannual interest payments of $20,000 ($500,000 x 8% x 6/12) and the principal payment of $500,000 at the end of the 8 years. The present value factor for a 16-period, 10% interest rate is 0.42213 (from the present value of 1 table) and the present value factor for a 16-period, 4% interest rate is 0.61662 (from the present value of an ordinary annuity table). 
Therefore, the present value of the semiannual interest payments is $168,852 ($20,000 x 0.42213 x 16) and the present value of the principal is $292,532 ($500,000 x 0.61662). Adding these amounts gives us a present value of $461,384, which is the issue price of the bond rounded to the nearest whole dollar. Therefore, the best choice is B.

On January 1, a Company Issues 8