Enviro Company issues 8%, 10-year bonds with a par value of $280,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 1/2.
Par value | x Price | = | Selling Price |
87 1/2 | |||
Cash Flow | Table Value | Present Value | |
280 000 par (maturity) value | |||
11 200$ interest payment | |||
Price of bond | |||
Difference due to rounding of table values |
Par value | price | selling price |
280,000 | 87 1/2 | 245,000 |
Cash flow | Table value | present value |
280000 maturity value | 0.3769 | 105,532 |
11200 interest payment | 12.4622 | 139,576.64 |
Price of bond | 245,108.64 | |
Difference due to rounding off | 108.64 | |
Note: since interest payments are semi annual, relevant factors are PVF(5%, 20 periods) and PVAF(5%, 20 periods)
Semi annual market rate =10%/2 =5%
Number of semi annual periods = 10*2 = 20
Enviro Company issues 8%, 10-year bonds with a par value of $280,000 and semiannual interest payments....
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