Calculate the Present Value of Bonds Issued by Teal Inc.

What is the present value calculation for bonds issued by Teal Inc.?

Teal Inc. issues $2,900,000 of 7% bonds due in 10 years with interest payable at year-end. The current market rate of interest for bonds of similar risk is 11%. What amount will Teal receive when it issues the bonds?

Calculation of Present Value

Teal Inc. will receive $2,016,250 when it issues the bonds based on the present value calculation using a 11% market interest rate.

When a company like Teal Inc. issues bonds, it is important to calculate the present value to determine the amount it will receive at the time of issuance. The present value of a bond is calculated based on the future cash flows of the bond and the market interest rate at the time of issuance.

The formula to calculate the present value of a bond is:

Present Value = Coupon Payment × [1 - (1 + Market Interest Rate)^(-Number of Periods)] / Market Interest Rate + Face Value / (1 + Market Interest Rate)^(Number of Periods)

In this case, Teal Inc. is issuing bonds with a face value of $2,900,000, a coupon rate of 7%, a market interest rate of 11%, and a maturity of 10 years. Using the formula, the calculation is as follows:

Present Value = $2,900,000 × [1 - (1 + 0.11)^-10] / 0.11 + $2,900,000 / (1 + 0.11)^10

Present Value = $2,900,000 × [1 - 0.314972] / 0.11 + $2,900,000 / 1.685028

Present Value = $2,900,000 × 0.685028 / 0.11 + $2,900,000 / 1.685028

Present Value = $1,986,050.91 + $1,725,199.09

Present Value = $3,711,250

Therefore, Teal Inc. will receive $2,016,250 ($3,711,250 - $2,900,000) when it issues the bonds.