Question

Required information [The following information applies to the questions displayed below.) On January 1, 2021, Frontier World issues $39.0 million of 7% bonds, due in 10 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 6%, 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 39,000,000 $ Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate Issue price

Answer 1

(1)

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

interest on bond = $39,000,000 x 3.5% = $1365000

Issue price = present value of annual interest on bond x present value of principal value on bond

= ($1365000 x 14.87747) + ($39,000,000 x 0.55368)

= $20,307,746.55 + $21,593,520

= $41,901,267

where,

Market interest rate semiannually = 6%/2 = 3%

Number of period = 10 x 2 = 20

PVAF(3%,20) = 14.87747

PVF(3%,20) = 0.55368

(2)

The bond will issue at A premium