Marwick Corporation issues 8%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the following Present Value factors:
A)$1,000,000
B)$789,244
C)$1,341,208
D)$1,085,308
E)$658,792

Question

Marwick Corporation issues 8%,5-year bonds with a par value of $1,000,000 and semiannual interest payments.On the issue date,the annual market rate for these bonds is 6%.What is the bond's issue (selling)price,assuming the following Present Value factors: 
A)$1,000,000 
B)$789,244 
C)$1,341,208 
D)$1,085,308 
E)$658,792

Quizplus · Accepted Answer

The present value of the bond's semiannual interest payments can be calculated using the following formula: 
Interest payment / (1 + market rate/2)^number of semiannual periods 
= $40,000 / (1 + 0.03)^10 
= $28,268.59

The present value of the bond's par value can be calculated using the same formula, with the only difference being that the number of semiannual periods is multiplied by 2 since there are two payments per year: 
Par value / (1 + market rate/2)^number of semiannual periods 
= $1,000,000 / (1 + 0.03)^10*2 
= $816,040.52

The total present value of the bond can then be calculated by summing the present values of the interest payments and the par value: 
= $28,268.59 * 10 + $816,040.52 
= $1,085,308.42

Therefore, the issue (selling) price of the bond is $1,085,308. Option D is the correct answer.

Marwick Corporation Issues 8%,5-Year Bonds with a Par Value of $1,000,000