Question

A company issues $100,000 of 6%, 5-year bonds dated January 1 that pay interest semiannually. The bonds are issued when the market rate is 8%. The present value tables indicate the present value factor of an annuity for 3% at 10 periods is 8.5302; and for 4% at 10 periods is 8.1109. To find the present value of the interest payments, multiply _______ by the present value factor _________.

Answer 1

Answer:

To find the present value of the interest payments, multiply $3,000 by the present value factor 8.1109.

Explanation:

the market price of the bonds:

• present value of face value = $100,000 / (1 + 4%)¹⁰ = $67,556.47
• present value of coupon payments = $3,000 x 8.1109 (PV annuity factor, 4%, 10 periods) = $24,332.70

market price = $91,889.17

Since the market rate is higher than the coupon rate, the bonds will be sold at a discount.