Homework Answers
Answer is option (b) $923491.41
Explanation;
Market interest rate = 8%
Market interest rate for a semiannual period (8 % / 2) = 4%
r = .04
n = 30
Present value of principal;
$850000 * Present value factor at 4% and 30 periods
($850000 * 0.3083)
= $262055
Interest payment each semiannual period;
Interest rate = 9% annual
Interest rate for a semiannual period (9 / 2) = 4.5%
r = .045
($850000 * .045) = $38250
Present value of interest;
Interest payment each semiannual period * Present value factor for an ordinary annuity (4%, 30 periods)
$38250 * 17.292 = $661419
Issue price of bonds =
Present value of principal + Present value of interest payments
$262055 + $661419 = $923474 (Approx.) or $923491.41
Due to decimal points answer may be different upto some values.
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