Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiann

Question

Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87 1/2. Confirm that the bonds' selling price is approximately correct (within $100). Use the present value tables B.1 and B.3 in Appendix B. (Round all table values to 4 decimal places, and use the rounded table values in calculations.) Par Value x Price = Selling Price 87 1/2 Cash Flow Table Value Present Value $250,000 par (maturity) value $10,000 interest payment Price of Bond Difference due to rounding of table values

Explanation / Answer

Solution.

Calculation for price of Bond.

Par Value x Price Equal Selling                                                                       250,000.00 87 1/2    218,844.47 Cash Flow Table Value Present value 250,000 par ( maturity ) value 0.3769       94,222.37 10,000 Interest payment 12.4622     124,622.10 Price of Bond     218,844.47

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