Question

# Your organization is considering purchasing a general obligation term bond that makes semiannual interest payments. The...

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

#### Homework Answers

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

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