Question

If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount a.equal to the face value b.greater than face value c.less than face value d.The answer cannot be determined from the information given.

Answer 1

Answer:

b. greater than face value

Explanation:

To find out the how much is selling amount, first we have to do the calculations which are shown below

The computation of the value of the bond is shown below:

= Present value of interest + Present value of full and final payment

where,  

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

Present value of interest equals to

= $10,000 × 12% × 8.5136

= $10,216.32

The 7.36009 is a PVAF Refer to the PVAF table

And, the Present value of maturity equals to

= $10,000 × 0.1486

= $1,486

The Present value factor is computed below:

= 1÷( 1 + rate)^time

=1÷(1 + 0.10)^20

Now put these values to the above formula  

So, the value would equal to

= $10,216.32 + $1,486

= $11702.32 approx