# Question Nest Corporation issued $100,000, 10-year mortgage bonds to Net Corporation at Par value. The bonds bear a nominal interest rate of 12% and interest is paid semi-annually on January 1 and July 1. The market rate of interest is 11%. The original issue price of bonds for Net Corporation would be (Round your answer to the nearest dollar) a.$100,000 b. $112,000 c.$105,975 d. $111,000 KVRRM7 The Asker · Accounting Transcribed Image Text: Nest Corporation issued$100,000, 10-year mortgage bonds to Net Corporation at Par value. The bonds bear a nominal interest rate of 12% and interest is paid semi-annually on January 1 and July 1. The market rate of interest is 11%. The original issue price of bonds for Net Corporation would be (Round your answer to the nearest dollar) a. $100,000 b.$112,000 c. $105,975 d.$111,000
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Transcribed Image Text: Nest Corporation issued $100,000, 10-year mortgage bonds to Net Corporation at Par value. The bonds bear a nominal interest rate of 12% and interest is paid semi-annually on January 1 and July 1. The market rate of interest is 11%. The original issue price of bonds for Net Corporation would be (Round your answer to the nearest dollar) a.$100,000 b. $112,000 c.$105,975 d. $111,000 Community Answer 8XXIGC CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID HLF ANNUALLY &#160; &#160; &#160; &#160; &#160; Step 1 : Calculation of Semi Annual Coupon Payments &#160; &#160; Par value&#160; of the bond issued is&#160;&#160; = &#160;$100,000 &#160; Annual Coupon %&#160; &#160; &#160; 12.00% &#160; Annual Coupon Amount &#160; &#160; $12,000 &#160; Half Year Coupon Amount = &#160;$6,000 &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; Step 2: Calculate number of years to Maturity &#160; &#160; &#160; Number of years to maturity = 10 years &#160; &#160; &#160; No. of Half Year Period = 10 Years X 2 Period = 20 Periods&#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; &#160; Step 3 : Calculation of Current Market Price (intrinsic value) of the bonds &#160; &#160; &#160; &#160; &#160; &#160; Market rate of interest or Yield to Maturity or Required Return = 11% &#160; &#160; Half yearly Discount rate = 11 % / 2&#160; = 5.50% &#160; &#160; &#160; &#160; &#160; &#160; &#160; PVF = 1 / Discount rate = 1/ 1.055 &#160; &#160; &#160; Result of above will again divide by 1.055 , repeat this let period &#160; &#160; &#160; &#160; &#160; &#160; &#160; Period Interest Amount (In Million) PVF of $1 @ 5.5% Present Value 1 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.9479 $5,687 2 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.8985 $5,391 3 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.8516 $5,110 4 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.8072 $4,843 5 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.7651 $4,591 6 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.7252 $4,351 7 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160; 0.6874 $4,125 8 Interest$6,000 &#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#160;&#1 ... See the full answer