Question

Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for:

Select one:
A. 10 periods and 10% from the present value of 1 table
B. 10 periods and 8% from the present value of 1 table
C. 20 periods and 5% from the present value of 1 table
D. 20 periods and 4% from the present value of 1 table.

Answer 1

The issue price of ten-year, 10% bonds that pay interest semiannually and are sold to yield 8% is calculated by multiplying the principal by the present value table value for 20 periods and 4%.

Step-by-step explanation:

When calculating the issue price of bonds, you will want to consider the present value of the bond's principal and the present value of the bond's interest payments. For Jordan Company which purchased ten-year, 10% bonds that pay interest semiannually, the bonds are sold to yield 8%. To find the present value of the principal, you would need to look up the value in a present value of 1 table for the yield rate and corresponding periods.

The bonds pay interest semiannually, meaning there are 2 periods per year over a span of 10 years, equating to 20 total periods. Since the bonds are sold to yield 8%, we divide this annual rate by two to account for the semiannual periods, resulting in a rate of 4% per period. Thus, we use the table value for 20 periods and 4% from the present value of 1 table, making the correct answer D. 20 periods and 4% from the present value of 1 table.