Home / Business /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

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

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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
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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
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CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID HLF ANNUALLY           Step 1 : Calculation of Semi Annual Coupon Payments     Par value  of the bond issued is   =   $100,000   Annual Coupon %      12.00%   Annual Coupon Amount     $12,000   Half Year Coupon Amount =   $6,000                       Step 2: Calculate number of years to Maturity       Number of years to maturity = 10 years       No. of Half Year Period = 10 Years X 2 Period = 20 Periods                          Step 3 : Calculation of Current Market Price (intrinsic value) of the bonds             Market rate of interest or Yield to Maturity or Required Return = 11%     Half yearly Discount rate = 11 % / 2  = 5.50%               PVF = 1 / Discount rate = 1/ 1.055       Result of above will again divide by 1.055 , repeat this let period               Period Interest Amount (In Million) PVF of $ 1 @ 5.5% Present Value 1 Interest $6,000                         0.9479 $5,687 2 Interest $6,000                         0.8985 $5,391 3 Interest $6,000                         0.8516 $5,110 4 Interest $6,000                         0.8072 $4,843 5 Interest $6,000                         0.7651 $4,591 6 Interest $6,000                         0.7252 $4,351 7 Interest $6,000                         0.6874 $4,125 8 Interest $6,000                  &#1 ... See the full answer

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