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Present Value of Bonds Payable; Premium Moss Co. issued $100,000 of five-year, 11% bonds with interest...

Present Value of Bonds Payable; Premium

Moss Co. issued $100,000 of five-year, 11% bonds with interest payable semiannually, at a market (effective) interest rate of 8%.

Determine the present value of the bonds payable, using the present value tables in Exhibit 8 and Exhibit 10.

Note: Round to the nearest dollar.

$

Expert Solution

Par value of bonds = $100,000

Stated interest rate = 11%

Semi annual interest payment = 100,000 x 11% x 6/12

= $5,500

Market interest rate = 8%

Semi annual market interest rate = 8/2

= 4%

Bond life = 5 years or 10 semi annual years

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

= 100,000 x Present value factor (4%, 10)

= 100,000 x 0.67556

= $67,556

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

= 5,500 x Present value annuity factor (4%, 10)

= 5,500 x 8.11090

= $44,610

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

= 67,556 + 44,610

= $112,166

Exact answer may slightly differ due to rounding off and factor values considered.

ekkarill92 answered 6 months ago

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