Question

Question: Using the bond details in QS 10-4, 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$240,000

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)
$240,000 par (maturity) value	B.1 (PV of 1)	0.2314	$240,000	$55,536	$55,500
$12,000 interest payments	B.3 (PV of ann.)	15.3725	$12,000	$184,470	$184,500
Bonds’ selling price	$240,000

Working note:

Calculation of semi-annual interest on bond

$$\begin{gathered} \text{Interest} \text{amount}=\$240,000\times 10\%\times \frac{1}{2} \\ =\$12,000 \end{gathered}$$

Note: Interest will pay on a semi-annual basis for 15 years, so the number of instalments will be 30, and the present value factor is taken at @5% of the 15th year.