Question

Ivanhoe Company is about to issue $432,000 of 8-year bonds paying an 11% interest rate, with interest payable annually. The discount rate for such securities is 10%.

Answer 1

Here face value of the bond or FV = $432,000; nper = 8 years and PMT = 11% of 432,000 = $47,520

Now we have to find the PV of the bond. This is the amount at which you can sell the bond. PV of a bond is the present value of its future cash flows. To compute the present value we will use a rate of 10% which is the discount rate.

Thus amount at which bonds can be sold = PV (10%, 8, 47520, 432000). This will give a value of $455,046.88

Thus the bonds can be sold at $455,046.88.

(Note that it can be sold at a premium because its coupon rate of 11% > discount rate of 10%).