Sample Essay

The price paid by Nalani Company for Arapaho Company bonds can be calculated by determining the present value of the interest payments and principal repayment. The present values are determined by applying a rate of 4% which is half of 8% as payments are semiannual.

The present value can be calculated using the following formula (Brigham & Ehrhardt, 2001).

Present value of annuity = PMT [1 – {1 / (1+i) n} / i]

Present Values of interest payments

Number of Periods = 4

Semiannual interest payments = 500

Present value of interest payments = 45 [1 – {1 / (1+0.04) 4} / 0.04]

Present value of interest payments = $163.15

Present value of principal repayment = 1000 / (1.04)4

Present value of principal repayment = $855

Price paid by Nalani Company = 163 + 855 = $1018.15

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