Question

Adcock Company issued $600,000, 9%, 20-year bonds on January 1, 2020, at 103. Interest is payable annually on January 1. Adcock uses straight-line amortization for bond premium or discount.

Answer 1

When interest rates rise, the value of existing bonds decreases. Use the present value formula to calculate the new value of the bond.

Step-by-step explanation:

When interest rates rise, the value of existing bonds decreases. This is because the higher interest rates make the bond's fixed interest payments less attractive compared to newer bonds that offer higher interest rates. In this case, since the interest rate has risen from 6% to 9%, we would expect the bond to be worth less than $10,000.

To calculate the new value of the bond, we can use the present value formula. The formula is: PV = C / (1 + r)^n + C / (1 + r)^(n-1) + ... + C / (1 + r) + C

Where PV is the present value, C is the coupon payment (interest payment), r is the discount rate (interest rate), and n is the number of periods (years). Using the formula, we can calculate the present value of the bond with the new interest rate of 9%.