Question

Your organization is considering purchasing a general obligation term bond that makes semiannual interest payments. The bond has a face value of $12,000, a coupon rate of 6.5%, and will reach its maturity in 15 years. If the current market interest rate is 6.25% and the bond is being offered at a price of $12,500, from a financial perspective, the organization should (select one):

• A. purchase the bond
• B. not purchase the bond

Answer 1

We need to calculate the present value first

Semi annual period	Amount	Discount Factor	Present Value
1	390	0.970	$        378.18
2	390	0.940	$        366.72
3	390	0.912	$        355.61
4	390	0.884	$        344.83
5	390	0.857	$        334.38
6	390	0.831	$        324.25
7	390	0.806	$        314.42
8	390	0.782	$        304.90
9	390	0.758	$        295.66
10	390	0.735	$        286.70
11	390	0.713	$        278.01
12	390	0.691	$        269.59
13	390	0.670	$        261.42
14	390	0.650	$        253.49
15	390	0.630	$        245.81
16	390	0.611	$        238.36
17	390	0.593	$        231.14
18	390	0.575	$        224.14
19	390	0.557	$        217.34
20	390	0.540	$        210.76
21	390	0.524	$        204.37
22	390	0.508	$        198.18
23	390	0.493	$        192.17
24	390	0.478	$        186.35
25	390	0.463	$        180.70
26	390	0.449	$        175.23
27	390	0.436	$        169.92
28	390	0.422	$        164.77
29	390	0.410	$        159.78
30	390	0.397	$        154.93
30	12000	0.397	$     4,767.19
			$   12,289.31

The present value of all benefits is 12,289

Current price is 12,500

So in this case it is costly should NOT PURCHASE