Question

Present Value of Bonds Payable; Premium Moss Co. issued $105,000 of five-year, 12% bonds with interest payable semiannually, at a market (effective) interest rate of 9%.

Determine the present value of the bonds payable, using the present value tables in Exhibit 8 and Exhibit 10.

Note: Round to the nearest dollar. $

Answer 1

Present value of bonds payable = Present value of Bond maturity sum i.e.par value + Present value of semi annual bond interest payments

Step 1 - Calculation of present value of bond maturity sum

Present value of bond maturity sum = Bond Par value * Discount factor of 10th Semi annual period i.e.of 5th year using 9% interest rate

Present value of bond maturity sum = $105000 * (1+0.045)^-10

Present value of bond maturity sum = $105000 * 0.643928

Present value of bond maturity sum = $67,612.41

Step 2 - Calculation of Present value of semi annual bond interest payments

Using present value of annuity formula, we can calculate this value.

Present value of annuity = P*{[1 - (1+r)^-n]/r}

Present value of annuity = Present value of semi annual bond interest payments = ?

P = semi annual interest payment = $105000 * 12%/2 = $6300

r = semi annual interest rate = 4.5%

n = number of semi annual payments = 10

Present value of annuity = 6300*{[1 - (1+0.045)^-10]/0.045}

Present value of annuity = 6300*7.912718

Present value of annuity = 49850.12

Present value of semi annual bond interest payments = $49,850.12

Present value of bonds payable = $67,612.41 + $49,850.12

Present value of bonds payable = $1,17,463