Question

Brief Exercise 14-1 Blossom Corporation issues $570,000 of 9% bonds, due in 11 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) Issue price of the bonds LINK TO TEXT

Answer 1

Answer:- The issue price of the bonds is = $532486.

Explanation-Calculation of selling price of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 4.5% (= 9%/ 2), the market interest rate is 5% (= 10%/ 2) and number of time periods are 22 (= 2*11). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =4.5%*$570000*{1-(1+5%)^-22/5%} +$570000/(1+5%)²²

                         =($25650*13.16300)+ ($570000*0.34185)

                         = $337631+$194855

                         =$532486