Question

Present Value of Bonds Payable; Premium Moss Co. issued $440,000 of four-year, 13% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%. Determine the present value of the bonds payable, using the present value tables in Exhibit 5 and Exhibit 7. Round to the nearest dollar. $ 467,872 X Feedback

Answer 1

Semi annual interest payment = 440,000 x 13% x 6/12

= $28,600

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 440,000 x Present value factor (5.5%, 8)

= 440,000 x 0.65160

= $286,704

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 28,600 x Present value annuity factor (5.5%, 8)

= 28,600 x 6.33457

= $181,169

Present value of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= $286,704 + $181,169

= $467,873

Exact answer may slightly differ due to rounding off and factor value considered. You did not provide factor table. Factor values may range from two decimal places to five decimal places. Thus, answer will differ depending on the factor value taken.

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