Question

Interest rates determine the present value of future amounts. (Round to the nearest dollar.) (Click the icon to view Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) 5 (Click the icon to view Future Value of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) Read the requirements. Requirement 1. Determine the present value of 10-year bonds payable with face value of $87,000 and stated interest rate of 12%, paid semiannually. The market rate of interest is 12% at issuance. (Round intermediary calculations and final answer to the nearest whole dollar.) Present Value When market rate of interest is 12% annually

Answer 1

Answer -

Step - (1) - Information Given -

Face value of bonds = $87000.

Tenure = 10 years

Interest rate = 12%.

Market rate of interest (Discount rate) = 12%.

.

Step - ( 2 ) - Calculation of the Present Value of Bonds -

	Particulars	Formula used	Calculations	Amount ($)
I.	Present Value of Bonds Interest Payments	p [1 - (1 + r )-n / r] p = Interest payments = [($87000*12%)/2] = $5220. r = Adjusted discount rate = (12% / 2) = 0.06 n = Number of interest payments = (10 * 2) = 20	$5220 [1-(1+0.06)-20 / 0.06]	59873
II.	Present Value of Face Value of Bonds	FV / (1 + r)n FV = Face Value of bond = $87000. r = Adjusted discount rate = (12% / 2) = 0.06 n = 20	$87000 / (1+0.06)20	27127
Present Value of Bonds			I + II	87000