Bond Question

  • Creator
    Topic
  • #194299
    Oimie
    Member

    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

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