Question

Abbott, Inc., plans to issue $500,000 of ten percent bonds that will pay interest semiannually and mature in five years. Assume that the effective interest rate is 12 percent per year compounded semiannually. Calculate the selling price of the bonds.

Answer 1

Answer:

$463,202.25

Explanation:

The computation of the selling price of the bond is shown below:

= Present value of interest + Present value of maturity

where,

In semi-annually, the rate of interest is divided by 2 and the time period is double

The Present value of interest equals to

= $500,000 × 5% × 7.36009

= $184,002.25

The 7.36009 is a PVIFA. Refer to the PVIFA table

And, the Present value of maturity equals to

= $500,000 × 0.5584

= $279,200

The Present value factor is computed below:

= 1÷( 1 + rate)^time

=1÷(1 + 0.06)^10

Now put these values to the above formula  

So, the value would equal to

=  $184,002.25 +  $279,200

= $463,202.25