Question
In: Accounting
Alton Corp. purchased ten $ 1000 7% bonds of Galvan Corporation when the market rate of...
Alton Corp. purchased ten $ 1000 7% bonds of Galvan Corporation when the market rate of interest was 14%. Interest is paid semiannually, and the bonds will mature in five year.
|
Alton paid |
$ |
on the bond investment. |
I need the Present value of the bonds?
Solutions
Expert Solution
Present Value of the Bond
The Present Value of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value
Face Value of the bond = $1,000
Semi-annual Coupon Amount = $35 [$1,000 x 7% x ½]
Semi-annual Yield to Maturity of the Bond = 7.00% [14.00% x ½]
Maturity Period = 10 Years [5 Years x 2]
Therefore, the Value of the Bond = Present Value of the Coupon Payments + Present Value of the face Value
= $35[PVIFA 7.00%, 10 Years] + $1,000[PVIF 7.00%, 10 Years]
= [$35 x 7.02358] + [$1,000 x 0.50835]
= $245.82 + $508.35
= $754.17
“Therefore, the Present Value of the Bond will be $754.17”
NOTE
-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)n} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.
-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.
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