Question

Present Value of Bonds Payable; Premium

Moss Co. issued $560,000 of five-year, 12% bonds, with interest payable semiannually, at a market (effective) interest rate of 11%.

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

Correct Answer:

Present value of bonds payable = $ 581,105

Working:

Annually		Formula Applied
Face Value of Bond	$                          560,000
Interest Annually @ 12 % (12/200 * 560,000)	$                            33,600	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 11%/2)	0.055	11%
Time Period (n) 5 years	10.00	5
Present Value of Face Value of Bond	$             327,841.12448	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    253,264.23	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond (present value of bonds payable)	$                          581,105	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                            21,105	Issue Price - Face Value of Bonds

End of answer.

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