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Present Value of Bonds Payable; Premium Moss Co. issued $610,000 of five-year, 13% bonds, with interest...

Present Value of Bonds Payable; Premium

Moss Co. issued $610,000 of five-year, 13% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%.

Determine the present value of the bonds payable, using the present value tables in Exhibit 5 and Exhibit 7. Round to the nearest dollar.
$

Expert Solution

Answer:- The present value of bond investment = $655960.

Explanation-Calculation of selling price of bond at issuance=

B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 6.5% (= 13%/ 2), the market interest rate is 5.5% (= 11%/ 2) and number of time periods are 10 (= 2*5). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =6.5%*$610000*{1-(1+5.5%)^-10/5.5%} +$610000/(1+5.5%)¹⁰

=($39650*7.5376)+ ($610000*0.5854)

= $298866+$357094

=$655960

ekkarill92 answered 1 year ago

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