Accounting question..
posted by Walter on .
Having trouble figuring out how to do this problem for my accounting homework.. any help would be greatly appreciated..the information given goes as follows..
On 1/1/08 you issue $400,000 of 7%, 10 year bonds that pay intrest semiannually. The Market intrest rate is 8%
The problem says:
What is the present value of the bonds at issuance? (how much will you receive from the buyers of the bonds?)

Ok, you will need 4 items to plug into a formula for calculating the bond price.
1) cash flow (CF). The bond pays semiannually. So, each payment is 400,000*(.07/2) = 14,000
2) yield rate or interest rate (i). The annual rate is given as 8%, so the semiannual rate is 4%.
3) Payment at maturity (M). This is simply the issue ammount of 400,000.
4) number of payments (n). Semiannually over 20 years would be 40
So (sorry, but its hard to write formulas in this site):
Bond price = (CF) * (1  (1/(1+i)^n)/i) + (M) * (1/(1+i)^n)
Investopedia period com has this formula plus a nice explanation. (I am not allowed to post the link to the site).
Google "formula, yield to maturity"