Question

please show me the steps, no just the answers

On July 1, 2012 Poppin Kermels issues $2,000,000 five year bonds with a coupon of 3 %. Atthe time of sale the effective Interest is 4 % Interest is to be paid semi annually What type of bond is it? What is the present value (S) of the bond? Principal Coupon Real Interest rate Term Interest Payment Interest amount Present Value interest Present Value Principal Total Present Value of Bond (A) This method uses the PV tables & will not be on the test Results Below Can Be Found On PV Table Rates PV Annuity PV of One time payment Total Present Value of Bond 0 0 0 (B)

Answer 1

1) The bonds given in above question are called as Conventional Bond or Plane Vanila Bond as the coupon rate every year is same with bullet redemptions.

2)In the given question, the details given are as under

Principal: 20,00,000

Coupon Rate :3% payable semiannually

Period (n) : 5 years

Interest Rate : 4%

So,

Coupon Amount= 3% of 20,00,000 ×1/2

= 30000

Effective int rate= 4% for 6 month

= 2%

PV= Coupon Amt × PVAF (r,n)+ Redemption Amt× PVIF(r,n)

=30,000 × PVAF (2%,10) + 20,00,000× PVIF (2%,10)

=30,000× 8.982 + 20,00,000 × 0.8203

=269,460 + 16, 40,600

=19,10,060

So the present value is $ 19,10, 060