Question

Issue 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

$469,208

Step-by-step explanation:

First, convert the Effective rate to Annual Percentage Rate(APR)

APR =
`m [(1+EAR)^(1/m) -1]\\ \\ =2[(1.12)^(1/2) -1]\\\\ =2* 0.05830\\\\ APR =0.1166`

APR = 11.66%

Next, use these inputs in a financial calculator ;

N = 5*2 = 10

Semiannual rate in this case ; I/Y = 11.66% /2 = 5.83%

Face value; FV = 500,000

Semiannual coupon payment; PMT = (10%/2) *500,000 = 25,000

then CPT PV = $469,208.115

Therefore, to the nearest whole number is $469,208