Question

On December 31, 2021, Interlink Communications issued 5% stated rate bonds with a face amount of $115 million. The bonds mature on December 31, 2051. Interest is payable annually on each December 31, beginning in 2022. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Determine the price of the bonds on December 31, 2021, assuming that the market rate of interest for similar bonds was 6%. (Round your final answers to nearest whole dollar amount.)

Answer 1

Ans. The price of the bonds on December 31, 2021 discounted at 6% is $99,170,444

Explanation:

Hi, we need to use the following formula to find the present value of the bond, which is the same as saying, discount all future cash flows to present value.

`Price=(Coupon((1+r)^(n)-1) )/(r(1+r)^(n) ) +(FaceValue)/((1+r)^(n) )`

Where:

r= discount rate (in our case 6% or 0.06)

Coupon =$115,000,000*0.05=$5,750,000

n= periods of payment (in our case, 30 years or just 30)

Everything should look like:

`Price=(5,750,000((1+0.06)^(30)-1) )/(0.06(1+0.06)^(30) ) +(115,000,000)/((1+0.06)^(30) )`

`Price= 79,147,779.12 +20,022,665.05=99,170,444.18`

The price of the bond to the nearest whole dollar is $99,170,444

Best of luck.