Question

Required information The following information applies to the questions displayed below.] On January 1, 2021, Frontier World issues $39.5 million of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. Required: 1-a. If the market rate is 7%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors. Enter your answers in dollars not in millions. Round Market interest rate" to 1 decimal place. Round your final answers to the nearest whole dollar.) Amount 39,500,000 S Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate Issue price 1-b. The bonds will issue at A Discount A Premium Face amount

Answer 1

(A)

(1)

face amount = $39,500,000

(2)

Coupon rate = 8%/2 = 4% semiannually

Annual interest payment = $39,500,000 x 4% = $1,580,000

(3)

periods to maturity = 15 years

and 15 x 2 = 30 semi years

(4)

Market interest rate = 7%/2 = 3.5% semiannually

Time period = 15 x 2 = 30

Therefore,

PVF(3.5%, 30) = 0.35628

PVAF(3.5%, 30) = 18.39205

(5)

Issue price of bond = present value of principal value on bond + present value of interest on bond

= ($39,500,000 x 0.35628) + ($1,580,000 x 18.39205)

= $14,073,060 + $29,059,439

= $43,132,499

(B)

the bond will issue at a premium