CFA CFA Level 1 Calculating Present Value of a bond at Market Rate?

Calculating Present Value of a bond at Market Rate?

  • This topic has 2 replies, 2 voices, and was last updated Dec-17 by KBaltazar.
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  • KBaltazar
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    This is an example from the book but they don’t show the math on how they get the present value at market rate for the first year to be 47,619? Can someone please explain the problem is listed below?
    Debond Corp. (a hypothetical company) issues £1,000,000 worth of five-year bonds, dated 1 January 2010, when the market interest rate on bonds of comparable risk and terms is 5 percent per annum. The bonds pay 5 percent interest annually on 31 December. What are the sales proceeds of the bonds when issued, and how is the issuance reflected in the financial statements?

    artyeasel
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    Present value at market rate will be

    = 5% of 1,000,000 (paid in end of year) in present value (beginning of year)
    = 50,000 / (1.05) (“market interest rate on bonds of comparable risk and terms is 5 percent per annum”)
    = 47,619

    KBaltazar
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    Thank you so much

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