Question

In: Accounting

On December​ 31, 2018​, when the market interest rate is 10​%, McCann Realty issues $ 400...

On December​ 31, 2018​, when the market interest rate is 10​%, McCann Realty issues $ 400 comma 000 of 7.25​%, 10​-year bonds payable. The bonds pay interest semiannually. Determine the present value of the bonds at issuance.

Solutions

Expert Solution

  • Concept for determining issue price

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

  • Date required

Face Value

$             400,000.00

Term (in years)

10

Total no. of interest payments

20

Annual Rate

Applicable rate, because of Semi Annual payments

Market Rate

10.0%

5.0%

  • Answer calculation

Amount

PV factor at 5%

Present Values

PV of Face Value of

$             400,000.00

0.376889483

$          150,755.79

PV of Interest payments of

$               14,500.00 [400000 x 7.25% x 6/12]

12.46221034

$          180,702.05

Issue Price of Bonds

$          331,457.84 ANSWER

  • Present value of Bond
    = $ 331,458 (rounded off)

ekkarill92 answered 2 years ago
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