- This topic has 0 replies, 1 voice, and was last updated 8 years, 10 months ago by .
-
Topic
-
Camp Co. wishes to purchase a 5-year, 12% bond with a face value of $100,000 and interest payable semiannually on January 1 and July 1. The market rate on similar bonds is 10%. What price should Camp Co. pay for the bond?
This is a Sims question that I had to calculate it using provided PV charts.
The answer is (100,000 x .6139) + (6,000 x 7.7217) = $107,720
0.6139 = 10 periods 5%
7.7217 = 10 period 5%
I actually got the principal part wrong because I used PV value of 0.6209 which is 5 periods 10%. But I’m confused why using this PV value would end up with the wrong amount. Unlike the interest payments, the 100,000 is just one lump sum. So why wouldn’t 5 periods at 10% work out? The principal is calculated independently from interest rates so why would they use the interest rate’s PV factors of 10 periods of 5%?
Basically, I don’t see where the difference is coming from logically. Either way the 100,000 will be received after 5 years. Can someone clear things up for me?
FAR 85 June 2015
AUD 80 Nov 2015
REG 83 Nov 2015
BEC 79 Feb 2016
- You must be logged in to reply to this topic.