Question

Question: Using the bond details in QS 10-2, confirm that the bonds’ selling price is approximately correct (within $100). Use present value tables B.1 and B.3 in Appendix B

Short answer

Answer

The bond’s selling price is$218,800

Step-by-step solution

Meaning of Bond

Bonds refer to a written document issued by a company to raise funds for which the company pays interest to the bondholders and repays the borrowed amount after a specific period.

Calculation of bonds’ selling price using Present value table

Cash Flow	Table	Present value factor (A)	Amount (B)	Present Value (A)*(B)	Present Value (within $100)
$250,000 par (maturity) value	B.1 (PV of 1)	0.3769	$250,000	$94,225	$94,200
$10,000 interest payments	B.3 (PV of ann.)	12.4622	$10,000	$124,622	$124,600
Bonds’ selling price					$218,800

Working note:

Calculation of semi-annual interest on bond

$$\begin{gathered} \text{Interest} \text{amount}=\$250,000\times 8\%\times \frac{1}{2} \\ =\$10,000 \end{gathered}$$

Note: Interest will pay on a semi-annual basis for ten years, so the number of instalments will be 20, and the present value factor is taken at @5% of the 20th year.