Question

On January 1, 2018, Shirley Corporation purchased 12% bonds dated January 1, 2018, with a face amount of $19 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 16%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: Determine the price of the bonds at January 1, 2018.

Answer #1

Table values are based on |
||

n= | 20 | |

i= | 8% | |

Cash flow |
Amount |
Present value |

Interest | 1140000 | 11192691 |

Principal | 19000000 | 4076450 |

Price of bonds | 15269141 | |

Workings: |
||

Interest | 1140000 | =19000000*12%/2 |

Present value: | ||

Interest | 11192691 | =1140000*9.81815 |

Principal | 4076450 | =19000000*0.21455 |

PV factor: | ||

Interest | 9.81815 | =(1-(1.08)^-20)/0.08 |

Principal | 0.21455 | =1/1.08^20 |

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