In: Accounting
Brief Exercise A-13 Dempsey Railroad Co. is about to issue $318,000 of 10-year bonds paying an 12% interest rate, with interest payable semiannually. The discount rate for such securities is 8%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) How much can Dempsey expect to receive for the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.) Dempsey can expect to receive $ Click if you would like to Show Work for this question: Open Show Work
Price of bond is present value of cash flows from bond. | |||||||||||||
Present Value of coupon interest | $ 2,59,303 | ||||||||||||
Present Value of Face Value | $ 1,45,132 | ||||||||||||
Price of Bond | $ 4,04,436 | ||||||||||||
Working: | |||||||||||||
Face Value | 318000 | ||||||||||||
Semi annual Interest | = | 318000 | * | 6% | = | 19080 | |||||||
Present Value of annuity of 1 | = | (1-(1+i)^-n)/i | Where. | ||||||||||
= | (1-(1+0.04)^-20)/0.04 | i | 4% | ||||||||||
= | 13.59033 | n | 20 | ||||||||||
Present Value of 1 | = | (1+i)^-n | |||||||||||
= | (1+0.04)^-20 | ||||||||||||
= | 0.45639 | ||||||||||||
Present Value of coupon interest | = | 19080 | * | 13.59033 | = | $ 2,59,303 | |||||||
Present Value of face Value | = | 318000 | * | 0.45639 | = | $ 1,45,132 | |||||||