Question

Bowser Clothing sold $350,000 in 10-year bonds at an interest rate of 8 percent. The market rate for similar bonds is 9 percent. Bowser decides to pay interest annually. Assume that the PVF-OA10, 8% = 6.71008, PVF-OA10, 9% = 6.41766, PVF10, 8% = 0.46319, and PVF10, 9% = 0.42241. Based on this, Bowser sold the bonds for ________ of par. A. $333,500 B. $336,000 C. $342,000 D. $345,000

Answer 1

Based on this, Bowser sold the bonds for B. $336,000 of par.

How to find the selling price of the bond ?

To find out for how much of the par value Bowser Clothing sold the bonds, we need to calculate the present value of the bond's cash flows, which includes the present value of the bond's interest payments and the present value of the bond's face value .

Present Value of the Annuity of Interest Payments :

PV of interest payments = $28,000 * PVF-OA10, 9%

PV of interest payments = $28,000 * 6.41766

= $179,694.48

Present Value of the Face Value:

PV of face value = $350,000 * PVF10, 9%

PV of face value = $350,000 * 0.42241

= $147,843.50

Total PV of bond = $179,694.48 + $147,843.50

= $ 336, 000