Question

Present value of bonds payable; discount 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 payable semiannually, at a market (effective) interest rate of 9%. Determine the present value of the bonds payable, using the present value tables in Exhibits 8 and 10. Round to the nearest dollar.

Answer 1

Answer:

$23,021,880.00

Explanation:

The present value of the bond consists of the present value of semiannual coupon payment and present value of face value discounted using the market interest rate of 9% per year(but 4.5% semiannually)

present of face value=face value*discount factor

discount factor=1/(1+4.5%)^10=0.64393

present value of face value=$25,000,000*0.64393 =$16,098,250.00  

Present value of semiannual coupon=coupon payment*discount factor

The discount factor is the present value of annuity of 4.5% for ten periods i.e 7.91272

coupon payment=$25,000,000*7%*6/12=$875000

present of coupon=7.91272 *$875000 =$6,923,630.00  

total present value=$6,923,630.00+$16,098,250.00=$23,021,880.00