Question

Rosh Corporation is planning to issue bonds with a face value of $850,000 and a coupon rate of 10 percent. The bonds mature in four years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1 PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to nearest whole dollar amount.) Required: Compute the issue (sales) price on January 1 of this year for each of the following independent cases: a. Case A: Market interest rate: 10 percent. 850,000 Issue price $ b. Case B: Market interest rate: 8 percent Issue price c. Case C: Market interest rate: 12 percent. Issue price

Please complete parts B and C

Answer 1

Correct Answer:

Case a:

	Present value
When market rate of interest is 10% annually	$                 850,000

Working:

Annually		Formula Applied
Face Value of Bond	$                          850,000
Interest Semi-Annually @ 10%	$                            42,500	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 10%/2)	0.050	10%
Time Period (n) 4 years *2	8.00	4
Present Value of Face Value of Bond	$             575,313.45772	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    274,686.54	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          850,000	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                                      -	Issue Price - Face Value of Bonds

Case b:

	Present value
When market rate of interest is 8% annually	$                 907,228

Working:

Annually		Formula Applied
Face Value of Bond	$                          850,000
Interest Semi-Annually @ 10%	$                            42,500	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 8%/2)	0.040	8%
Time Period (n) 4 years	8.00	4
Present Value of Face Value of Bond	$             621,086.67425	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    286,141.66	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          907,228	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                            57,228	Issue Price - Face Value of Bonds

Case c:

	Present value
When market rate of interest is 12% annually	$                 797,217

Working:

Annually		Formula Applied
Face Value of Bond	$                          850,000
Interest Semi-Annually @ 10%	$                            42,500	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate ® ( 12%/2)	0.060	12%
Time Period (n) 4 years	8.00	4
Present Value of Face Value of Bond	$             533,300.51564	Face Value/(1+r%)^2n
Present Value of Interest payment	$                    263,916.24	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                          797,217	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                          (52,783)	Issue Price - Face Value of Bonds

End of answer.

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