Question

Having trouble figuring out how to do this problem for my accounting homework.. any help would be greatly appreciated..the information given goes as follows..

On 1/1/08 you issue $400,000 of 7%, 10 year bonds that pay intrest semiannually. The Market intrest rate is 8%

The problem says:

What is the present value of the bonds at issuance? (how much will you receive from the buyers of the bonds?)

Answer 1

Ok, you will need 4 items to plug into a formula for calculating the bond price.
1) cash flow (CF). The bond pays semi-annually. So, each payment is 400,000*(.07/2) = 14,000
2) yield rate or interest rate (i). The annual rate is given as 8%, so the semi-annual rate is 4%.
3) Payment at maturity (M). This is simply the issue ammount of 400,000.
4) number of payments (n). Semi-annually over 20 years would be 40

So (sorry, but its hard to write formulas in this site):
Bond price = (CF) * (1 - (1/(1+i)^n)/i) + (M) * (1/(1+i)^n)

Investopedia period com has this formula plus a nice explanation. (I am not allowed to post the link to the site).
Google "formula, yield to maturity"