Question

Desmond Corp. purchased fifteen $1,0007% bonds of Geotherm Corporation when the market rate of interest was 14%. Interest is paid semiannually, and the bonds will mature in nine years. Using the PV function in Excel compute the price Desmond paid (the present value) for the bond investment. (Assume that all payments of interest and principal occur at the end of the period. Round your answer to the nearest cent.) Desmond paid on the bond investment

Answer 1

To determine the value of the Geotherm Corporation bonds, one must calculate the present value of the bond's future semiannual interest payments and the principal repayment, discounted at the market interest rate of 14%.

Step-by-step explanation:

The calculation of the present value of a series of bond payments, taking into account a specified market interest rate, which is also known as the discount rate or yield to maturity. When a bond's coupon rate is lower than the market rate, as in this case with the Geotherm Corporation's bonds paying 7% interest when the market demands 14%, the bond will sell for less than its face value, which is also known as selling at a discount.

Using the present value formula, we can calculate the price paid by Desmond Corp for the bond investment by discounting the expected future cash flows—which are the semiannual interest payments and the principal repayment at maturity—back to their present value at the prevailing market interest rate of 14%.