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Dear Mike,
In a question, the company has bought a bond of $300 on 30 June 2009, the interest thereon payable half yearly in arrears. The bond shall mature on 30 June 2011. Assuming the discount rate of 8%, calculate the present value of the bond on 30 June 2009.
I understand that the cash flow to the company will be $12 on 31 December 2009 + $12 (30 June 2010 ) + $12(30 December 2010)+ $312 (30 June 2011). Is it correct?
If the interest is payable half yeraly, could you kindly help to advise what formula I shall use to discount the cash flow? Is the discount rate (1 divided by 0.8 divided by 2 for first half year)? And what is the difference if the interst is payable in advance instead of in arrears?
Thank you in advance for your help.
Hi
Steve Scott is unlikely to ask you to discount for half years.
Your profile of receipts is correct.
IF, ( and it’s a big IF! ) he asks for half yearly discounts, the first payment of $12 would have a pv of 5.555, the second would have a pv of 11.11, the third would have a pv of 5.14 and the fourth a pv of 267.49.
That’s discounting for 6 months, 1 year, 18 months and 2 years.
The 6 month is 12 / 1.08 =11.11. Then 11.11 / 2 = 5.55But it’s not going to happen ……. probably!
Hope that helps
Mike
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