On January 1, a company issues bonds with a par value of $300,000. The bonds mature in 5 years and pay 8% annual interest each June 30 and December 31. On the issue date, the market rate of interest is 6%. Compute the price of the bonds on their issue date. The following information is taken from present value tables:
Present value of annuity for 10 periods @ 3%…8.5302
Present value of annuity for 10 periods @ 4%…8.1109
Present value of 1 due in 10 periods @ 3%…0.7441
Present value of 1 due in 10 periods @ 4…0.6756
I cannot even figure out where to begin!!! Can someone please help me!!! I am desperate!!!
Discount all the interest payments for 5 years at 6 percent and then discount the par value at 6 percent and add the two together.
c/(1+i) +…..c/(1+i)^n + M/(1 + i)^n
November 12th, 2009 at 4:27 pm
Discount all the interest payments for 5 years at 6 percent and then discount the par value at 6 percent and add the two together.
c/(1+i) +…..c/(1+i)^n + M/(1 + i)^n
References :
November 12th, 2009 at 4:43 pm
Here are your important facts, to help you solve your problem:
(1) the number of periods are 5 years times 2-per-year.
(2) bond pays 300,000 times 8% every 6-months. This makes an annuity for so many periods. Your prof has given you PV of this kind of annuity that pays one dollar every period.
(3) At end of all periods periods, you get $300,000 as well. Your prof has given you the PV of one dollar paid after so many periods.
(4) the relevant rate of discounting is 6% per year or 3% per period.
Now you can easily calculate the bond value as the sum of present values of (a) the annuity and (b) the original amount back.
HTH
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November 12th, 2009 at 5:09 pm
brain hurt
accounting II
Can you email me
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