In: Accounting
Shriver Corp. purchased ten $1,000 3% bonds of Solar Corporation when the market rate of interest was 10%. Interest is paid semiannually, and the bonds will mature in ten years.
How much did shriver pay on the bond investment?
In order to find out the purchase price, we first need to calculate the Present Value of interest and redemption value an investor is expected to receive
Interest is 1,000 X 3% X 6/12 = $15 per semiannual period
Semi Annual Period | Amount | PV Factor | Present Value |
1 | 15 | 0.95238 | 14.29 |
2 | 15 | 0.90703 | 13.61 |
3 | 15 | 0.86384 | 12.96 |
4 | 15 | 0.8227 | 12.34 |
5 | 15 | 0.78353 | 11.75 |
6 | 15 | 0.74622 | 11.19 |
7 | 15 | 0.71068 | 10.66 |
8 | 15 | 0.67684 | 10.15 |
9 | 15 | 0.64461 | 9.67 |
10 | 15 | 0.61391 | 9.21 |
11 | 15 | 0.58468 | 8.77 |
12 | 15 | 0.55684 | 8.35 |
13 | 15 | 0.53032 | 7.95 |
14 | 15 | 0.50507 | 7.58 |
15 | 15 | 0.48102 | 7.22 |
16 | 15 | 0.45811 | 6.87 |
17 | 15 | 0.4363 | 6.54 |
18 | 15 | 0.41552 | 6.23 |
19 | 15 | 0.39573 | 5.94 |
20 | 15 | 0.37689 | 5.65 |
20 | 1000 | 0.37689 | 376.89 |
563.82 |
For one bond payment is 563.82, for 10 bonds payment will be
563.82 X 10 = 5638.2.
The reason why it is so low is because the interest offered by the
company is significantly lower than the interest available in the
market.