Question

Pinder co produces and sells high quality video equipment. to finance its operations pinder co issued $25,000,000 of five year, 7% bonds, with interest paybale semiannually at a market interest rate of 9%. Determine the present value of the bonds payable, round to the nearest dollar.

Answer 1

$23,021,112.50 approx

Step-by-step explanation:

The computation of the present value of the bond payable is shown below:

= Book value × PVIF for 10 years at 5% + Interest payment × PVIF for 10 years at 5%

= $25,000,000 × 0.6439 + $875,000 × 7.9127

= $16,097,500 + $6,923,612.50

= $23,021,112.50 approx

Refer to the PVIF and PVIFA table

The interest payment would be

= $25,000,000 × 7% ÷ 2

= $875,000

In case of semi annual, the time period is doubles whereas the interest rate is half