Answer :
Astrotech Inc. purchased $530,000 of Sain Corp. 4% bonds at a price of 488,688 to yield a market interest rate of 5%. The bonds pay interest semi-annually.
The first thing to do when solving a bond purchase is to compute the bond price, which is the total price paid for the bond. The market interest rate is then used to determine the present value of the bond's expected cash flows. The market rate of interest is 5%.
The 4% bond was issued at a discount of $41,312 ($530,000 - $488,688) with an interest rate of 4%, which is less than the market rate of 5%.As a result, the bond's current yield is greater than the bond's stated interest rate.
The bond's stated interest rate is 4%, while the bond's current yield is 5.63 percent. ($30,000 / $533,312) The bond's current market value is $533,312, which is greater than the purchase price of $530,000.
The current market value is higher than the bond's purchase price, which means that the market rate of interest on the bond is less than the bond's stated rate. As a result, the bond is selling for a premium.
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