Question

LaTanya Corporation is planning to issue bonds with a face value of $100.500 and a coupon rate of 7 percent. The bonds mature in seven years. Interest is paid annually on 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 $1) (Use the appropriate factors) from the tables provided. Round your final answer to whole dollars.) Required: Compute the issue (sale) price on January 1 of this year for each of the following independent cases: a. Case A: Market interest rate (annual): 7 percent Issue price b. Case B: Market interest rate (annual): 5 percent. Issue price c. Case C: Market interest rate (annual): 8 percent Issun price

Answer 1

Issue price of bond is equal to the present value of all future coupon payments and the principal amount

Case A = 100,500*7%*PVAF(7%, 7 years) + 100,500*PVF(7%, 7 years)

= 7035*2.624 +100,500*0.816

= $100,467.84

i.e. $100,468

Case B = 7035*PVAF(5%, 7 years) + 100,500*PVF(5%, 7 years)

= 7035*5.786 +100,500*0.711

= $112,160

Case C = 7035*PVAF(8%, 7 years) + 100,500*PVF(8%, 7 years)

= 7035*5.206 +100,500*0.583

= $95,216