Self-Test -- Selling Price of a Bond
$180,000
A. Selling Price of the Bond if
Payment Amt.
Table Factor
Present Value
for 10 periods @ 10% (effective annual rate)
$180,000
6.14457
$1,106,022.60
Present Value of $2,000,000 Maturity Pmt.
due in 10 periods @ 10% (effective annual rate)
$2,000,000
0.38554
$771,080.00
Selling Price of the Bond
$1,877,102.60
B. Selling Price of the Bond if
C. Selling Price of the Bond if
Payment Amt.
Table Factor
Present Value
for 10 periods @ 8% (effective annual rate)
$180,000
6.71008
$1,207,814.40
Present Value of $2,000,000 Maturity Pmt.
due in 10 periods @ 8% (effective annual rate)
$2,000,000
0.46319
$926,380.00
Selling Price of the Bond
$2,134,194.40
Annual
Cash Interest Payments:
$2,000,000 x
9% (stated annual rate)
=
Effective
Annual
Interest Rate =
10%
Present Value of
$180,000 Interest Pmts.
sold at a discount (
effective rate
>
stated rate
)
Effective
Annual
Interest Rate =
9%
No calculations required --
Effective Interest Rate
=
Stated Interest Rate