Question

Abbott, Inc., plans to issue $500,000 of ten percent bonds that will pay interest semiannually and mature in five years. Assume that the effective interest rate is 12 percent per year compounded semiannually. Calculate the selling price of the bonds. Round answers to the nearest whole number.

Answer 1

$463,202.25

Step-by-step explanation:

The calculation of the selling price of the bond is given below:

The selling price of the bonds is

= Present value of interest + Present value of maturity

where,

In semi-annually basis , the rate of interest would be divided by 2 and the time period would be double

So, The Present value of interest equals to

= $500,000 × 5% × 7.36009

= $184,002.25

The 7.36009 represent PVIFA factor. Refer to the PVIFA table for the same

And, the Present value of maturity is

= $500,000 × 0.5584

= $279,200

So, the selling price of the bond is

= $184,002.25 + $279,200

= $463,202.25