Unformatted text preview: + [($100,000 0%) Present Value of an
Ordinary Annuity Factor] PV factor
$35,056 ÷ $100,000
.35056 Examining Table 4 in Appendix A (i.e., present value of $1 table) for n = 8, we find that the effective rate is
14%. E11–25 Concluded
Note 3
$922 = ($1,000 Present Value Factor) + [($1,000 7%) Present Value of an Ordinary
Annuity Factor]
Since the proceeds (i.e., present value) are less than the face value, we know that the note was issued at
a discount. Consequently, the effective rate must be more than the stated rate. Try i = 9% for n = 5:
($1,000 .64993 from Table 4 in Appendix A) + [($1,000 7%) 3.88965 from Table 5 in Appendix A)]
= $649.93 + $272.28
= $922 (rounded)
Therefore, the annual effective interest rate must be 9%.
Bond 1
$11,635 = ($10,000 Present Value Factor) + [($10,000 3%) Present Value of an
Ordinary Annuity Factor] Since the proceeds are greater than the face value, we know that the bond was issued at a premium.
Consequently, the effective rate is less than the stated rate. Try i = 2% for n = 20:
($10,000 .67297 from Table 4 in Appendix A) + [($10,000 3%) 16.35143 from Table 5 in Appendix
A]
= $6,729.70 + $4,905.43
= $11,635 (rounded)
The effective rate per period is 2%. Since there are two interest periods per year, the annual effective
interest rate is 4%.
Bond 2
$54,323 = ($50,000 Present Value Factor) + [($50,000 4.5%) Present Value of an
Ordinary Annuity Factor]
Since the proceeds (i.e., present value) are greater than the face value, we know that the bond was issued
at a premium. Consequently, the effective rate must be less than the stated rate. Try i = 4% for n = 30:
($50,000 .30832 from Table 4 in Appendix A) + [($50,000 4.5%) 17.29203 from Table 5 in Appendix
A]
= $15,416.00 + $38,907.07
= $54,323 (rounded)
The effective rate per period is 4%. Since there are two interest periods per year, the annual effective
interest rate is 8%. E11–26
a. Since the bonds have a face value of $1,000 and they are selling for 89.16, an individual bond would have a
present value of $891.60 ($1,000 x 89.16%). For these bonds to be attractive to an investor who requires
an annual rate of return of 12%, the present value of the bonds' future cash flo...
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 Fall '08
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 Accounting

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