Question

Present value of bonds payable; discount

Pinder Co. produces and sells high-quality video equipment. To finance its operations, Pinder issued $25,000,000 of three-year, 8% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below.

Open spreadsheet

Determine the present value of the bonds payable. Round your answer to the nearest dollar.

$  

Answer 1

Answer:- The present value of bonds payable = $23397800.

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 4% (= 8%/ 2), the market interest rate is 5.5% (= 11%/ 2) and number of time periods are 6 (= 2*3). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond = 4%*$25000000*{1-(1+5.5%)^-6/5.5%} +$25000000/(1+5.5%)⁶

                         =($1000000*4.2703)+ ($25000000*0.7651)

                         = $4270300+$19127500

                         =$23397800