Question

On January 1, 2018, Sharp Company issued bonds with a face value of $500,000. The bonds...

On January 1, 2018, Sharp Company issued bonds with a face value of $500,000. The bonds mature in ten years and have a stated rate of 8%.

Required:

• Determine the selling price of the bonds if the market rate of interest was 10%.

• Determine the selling price of the bonds if the market rate of interest was 6%.

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Answer #1

Present value of principal = $500,000 * 0.386 = $193,000

Present value of interest payments = ($500,000 * 8%) * 6.145 = $245,800

Selling price of the bond = Present value of principal + Present value of interest payments

= $193,000 + $245,800

= $438,800

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Present value of principal = $500,000 * 0.558 = $279,000

Present value of interest payments = ($500,000 * 8%) * 7.360 = $294,400

Selling price of the bond = Present value of principal + Present value of interest payments

= $279,000 + $294,400

= $573,400

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