Question

Present Value of Bonds Payable; Premium

Moss Co. issued $850,000 of five-year, 12% bonds, with interest payable semiannually, at a market (effective) interest rate of 10%.

Determine the present value of the bonds payable, using the present value tables in Exhibit 5 and Exhibit 7. Round to the nearest dollar.

Answer 1

Solution:

Calculation of the Present value of the Bonds payable

Bond Face Value = $850,000

Coupon rate on Bond = 12%

Market interest rate = 10%

Bond term = 5 years

Interest paid semi annually, therefore applicable

Coupon rate = 12% /2 = 6%

Market rate = 10% /2 = 5%

No. of interest payments = 5 * 2= 10 payments

Interest payment per term = $850,000 * 6%

= $51,000

Present value of bond = (Bond face value * PV of $1 @5% for 10 period) + (Interest payment per period * PV annuity of $1 @5% for 10 periods)

= ($850,000 * 0.61391) + ($51,000 * 7.72173)

= $521,823.5 + $393,808.23

= $915,631.73

= $915,632