In: Accounting
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.
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] |
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% |
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 |