Valuing Bonds Using Present Value . Tsang, Inc., is considering the sale of two

Question

Valuing Bonds Using Present Value . Tsang, Inc., is considering the sale of two bond issues. Choice A is a $1,600,000 bond issue that pays semiannual interest of $128,000 and is due in 20 years. Choice B is a $1,600,000 bond issue that pays semiannual interest of $120,000 and is due in 15 years. Assume that the market interest rate for each bond is 12 percent. Calculate the amount that Tsang will receive if both bond issues are made. (Hint: Calculate the pres- ent value of each bond issue and sum.)

Explanation / Answer

E3A Choice A Choice B Face Value $1,600,000.00 $1,600,000.00 Coupon Payment $128,000.00 $120,000.00 Rate 12.00% 12.00% Period 40 30 Present Value $1,072,398.29 $1,020,026.75 Total Amount Tsang will receive = PV(A )+ PV(B) $2,092,425.05 Total present value Choice A: $1,072,398.29 Choice B: $1,020,026.75 Total present value of both bonds: $2,092,425.05

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