Saturn issues 6.5%, five-year bonds dated January 1, 2011, with a $500,000 par v

Question

Saturn issues 6.5%, five-year bonds dated January 1, 2011, with a $500,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $510,666. The annual market rate is 6% on the issue date.

Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2013.

Saturn issues 6.5%, five-year bonds dated January 1, 2011, with a $500,000 par value. The bonds pay interest on June 30 and December 31 and are issued at a price of $510,666. The annual market rate is 6% on the issue date.

Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2013.

Explanation / Answer

The bonds are due 1/1/2016 so there are four interest payments of 500,000*.065/2= 16,250

500,000 will be paid at maturity. The semiannual market rate is 3%.

Using an annuity table for 4 periods at 3% we get 3.7171 * 16,250= 60,402.88

Present value of 500,000 at 6% due in 2 years is 500,000/(1.06)^2= 444,998.20

So we have $505,401.08.

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