Question

ssue Price of a Bond Abbott, Inc., plans to issue $500,000 of ten percent bonds that will pay interest semiannually and mature in five years. Assume that the effective interest rate is 12 percent per year compounded semiannually. Calculate the selling price of the bonds. Round answers to the nearest whole number. Selling price of bonds is _?

Answer 1

Answer is given below with working

Calculation of Issue price Present value of Interest payments Present value of Face value of Bond Issue price of Bond $184,002 $279,197 $463,200 Working note Bond face value $500,000 Interest on Bond at 10% semi annual $25,000 Since interest payment is semi-annual Effective Interest rate semi annual rate 12.0% 6.0% PV factor 6% for 10 years Present value of interest payment 7.3601 $184,002 PV Factor 6% for 10th year 0.5584 $279,197 Present value of Bond face value