Question

Assume that Northern Petroleum Inc. issued the following bond on January 1: Face amount: $100,000 Contract interest rate: 12% Effective interest rate: 12% Interest is paid semiannually on January 1 and July 1 Term of bond: 5 years Based on this information, what is the present value of the periodic interest to be paid on the bonds? a.$60,000 b.$43,257 c.$12,000 d.$44,161

Answer 1

d. $44,161

Step-by-step explanation:

The computation is shown below:

The present value of the periodic interest to be paid on the bonds is

= Face amount × interest rate × present value of an annuity at 6% for 10 years

= $100,000 × 6% × 7.36009

= $44,161

Refer to the present value of an annuity table

On a semiannual basis, the interest rate is half and the time period doubles =. The same is applied in the above calculation.