Use the following information for questions 23 and 24. On January 1, 2016, the M

ID: 2485458 • Letter: U

Question

Use the following information for questions 23 and 24. On January 1, 2016, the Magic Company issued $1,000,000 in 7%, 10 year bonds. The bonds pay interest semiannually on January 1 and July 1. The market rate of interest was 9%. Magic wants to determine the issue price of the bonds. _____ 23. What is the present value of the face value? Choose the one below that is closest to your answer. a. $178,430 b. $414,640 c. $422,410 d. $502,570 _____ 24. What is the present value of the interest payments? Choose the one below that is closest to your answer. a. $639,639 b. $585,357 c. $497,497 d. $455,278

Explanation / Answer

T = 20 years and I = 4.5%

PV 1,000,000 * .41464 = $414,640

(present value of $1)

(23) option b $414,640

(24) interest = 1,000,000 * 3.5% = $35,000

$35,000 * 13.00794 =$455,278

Option (d) $455,278

(present value of ordinary annuity table)