On December 31, 2018, when the market interest rate is 14%, O'Brien realty issues $500,000 of...

On December 31, 2018, when the market interest rate is 14%, O'Brien realty issues $500,000 of 11.25%, 10 year bonds payable. The bonds pay interest semi annually. Determine the present value of the bonds at issuance.

Expert Solution

Answer

The present value (PV) of bond the sum of the present value of interest and the PV of the maturity amount. The PV of interest is the product of the semi-annual interest and the PVIFA factor at 7%.

Present Value = Interest x PVIFA _{7%, 20}

=$ 500,000 x 11.25% x 10.5940

2

= $ 297,956.25

The present value of maturity amount is the product of the maturity value:

Present Value = Maturity Value x PVIF _{7%, 20}

=$ 500,000 x 0.2584

= $ 129,200

Present value of the bonds at issuance = $ 297,956.25 + $ 129,200

= $ 427,156.25

ekkarill92 answered 2 years ago

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