Question

Primo, Inc. issued $50,000, 5-year, 7% bonds that pay interest annually on January 1 when the going market interest rate was 6%. The issue (sale) price of the bonds equals the present value of ______ and 5 periods. a) $50,000 plus the present value of an annuity of $3,500, both discounted at 7% b) $50,000 plus the present value of an annuity of $3,000, both discounted at 7% c) $50,000 plus the present value of an annuity of $3,500, both discounted at 6% d) $53,500 discounted at 7%.

Answer 1

Answer:

c) $50,000 plus the present value of an annuity of $3,500, both discounted at 6%

Explanation:

In pricing a coupon bond, you find the present value of the coupon payments which are in form of an annuity , and add to the present value of the Par value or Face value of the bond.

Formula for finding Price of bond = $\frac{PMT}{r} [1-(1+r)^{-n} ] + \frac{FV}{(1+r)^{n} }$

Coupon PMT = 7%*50,000 = 3,500

Interest rate; r = 6%

Next, plug in the numbers;

$=\frac{3500}{0.06} [1-(1+0.06)^{-5} ] + \frac{50000}{(1.06)^{5} } \\\\ =14,743.2733 + 37,362.9086\\\\ Price = 52,106.18$

Therefore, as you can see when the numbers are plugged in the formula, the  50,000 is discounted at 6%, so is the PMT of 3,500