Question
In: Accounting
On January 1, 20X1, WP Industries issued $200,000 (face value) of bonds with a stated (coupon)...
On
January 1, 20X1, WP Industries issued $200,000 (face value) of
bonds with a stated (coupon) rate of 6%. The bonds pay interest
semi-annually on June 30 and December 31 and mature in 15 years. If
the market rate of interest on the issue date was 8%, the bonds
will sell for
Select one:
a. $200,000
b. $171,420
c. $239,201
d. $165,416
e. $165,762
Solutions
Expert Solution
Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12
= 200,000 x 6% x 6/12
= $6,000
Market interest rate = 8%
Semi annual Market interest rate = 4%
Maturity period of bonds = 15 years or 30 semi annual periods
Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)
= 200,000 x Present value factor (4%, 30)
= 200,000 x 0.30832
= $61,664
Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)
= 6,000 x Present value annuity factor (4%, 30)
= 6,000 x 17.29203
= $103,752
Selling price of bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds
= 61,664+103,752
= $165,416
The bonds will sell for = $165,416
Correct option is d.
Kindly give a positive rating if you are satisfied with this solution and please ask if you have any query.
Thanks
ekkarill92 answered 2 years agoRelated Solutions
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