Ahed A. answered • 10/06/19

Bachelors Degree in Business Administration

Hi Earl,

The answer can be found using a financial calculator. Please see below for explanation:

A) **Purchase price:** Since the bond is issued at discount (Stated interest rate is **less **than market interest rate), the bond value will decline, in other words its purchase price will be less than the par value of $15,000. Input the following in your calculator to find the purchase price, keep in mind you have to solve for PV (Present Value):

1) __FV (Future Value):__ This is the amount the bond will be redeemed at, in this case its $15,000.

2) __PMT (Monthly payments)__ = $150 (12%/12 months * 15,000)

3) __I/Y (Market interest rate)__ = 1.25% (15%/12 months)

4) __N (Number of periods)__ 120 (10 years * 12 months)

-**Note: **We divided inputs #2 & #3 by 12 because the bond compounds on a monthly basis, and the interest rates are given on an annual basis.

Once you input the above information into your calculator, you will get **$12,675.64**, which is the bond purchase price.

B) **Discount Amount:** To find the discount amount, you subtract the par value from the purchase price. That being said, the discount amount = $15,000 - $12,675.64 = **$2,324.36**

Please let me know if you have any questions.

Thank you,

Ahed