Question

When patey pontoons issued 6% bonds on january 1, 2016, with a face amount of $600,000, the market yield for bonds of similar risk and maturity was 7%. the bonds mature december 31, 2019 (4 years). interest is paid semiannually on june 30 and december 31?

Answer 1

You are given a bond interest of 6% that was given on January 1, 2016, with a face value of $600,000. Also, the market yield for bonds of similar risk, that the market yield for bonds of similar risk and maturity was 7% and the interest is paid semiannually on June 30 and December 31. You are to find the bond value on January 1, 2016. In here, because the yield of the market is above 6%, the bonds will have a discount for bonds less than $600,000.

Cash interest
= 0.06 * $600,000 * 6/12 (because it is done semiannually)
= $18,000
7%/2 = 3.5%

PV of interest at 3.5%
= $18,000 * 6.87396
= $123,731

PV of face at 3.5%
= $600,000 * 0.75941
= $455,646

Value of bond
= PV on interest + PV of face
= $123,731 + $455,646
= $579,377