Question

Presented below is a partial amortization schedule for discount pizza. (1) period (2) cash paid for interest (3) interest expense (4) increase in carrying value (5) carrying value issue date $54,834 1 $1,550 $1,645 $95 54,929 2 1,550 1,648 98 55,027 required: 1.

Answer 1

The present value of a two-year bond with a face value of $3,000 and an 8% interest is calculated using the present value formula. For an 8% discount rate, the total present value equals the face value. If the discount rate changes, similar calculations with the new rate determine the revised present value.

Step-by-step explanation:

To calculate the current worth of a simple two-year bond with a face value of $3,000 and an interest rate of 8%, we use the present value formula. For a discount rate of 8%, the present value (PV) of the first year's interest ($240) is calculated as $240/(1+0.08)¹ which equals $222.22. The PV of the $3,240 (interest plus principal) received in the second year is $3,240/(1+0.08)², which equals $2,777.78. Adding these amounts together gives us a total present value of $3,000. If the discount rate rises to 11%, we would perform similar calculations with the new rate to find out the revised present value.

When the market discount rate changes, so does the present value of the bond's future payments. Higher discount rates result in lower present values, and vice versa. This calculation is crucial for investors to determine how much a bond is worth in the present when interest rates fluctuate.