Question

On January 1, a company issues bonds dated January 1 with a par value of $360,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8%. Using the present value factors below, the issue (selling) price of the bonds is: n= 3 6 3 6 i= 7.0% 3.5% 8.0% 4.0% Present Value of an Annuity 2.6243 5.3286 2.5771 5.2421 Present value of $1 0.8163 0.8135 0.7938 0.7903 Multiple Choice $66,050. 0 $360,000 0 $369,442. 0 $350,558 0 $284,508.

Answer 1

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Issue price of bonds	=	$    3,50,558
Workings:
Cash flow	Period	Amount	P.V Factor @ 4%	Present Value
Maturity value	6	$    3,60,000	0.7903	$         2,84,508
Interest (annuity)	1 to 6	$       12,600	5.2421	$            66,050
Total proceeds				$         3,50,558
Working notes:-
Interest is payable semi-annually i.e twice a year
Semiannual coupon rate	=	Coupon rate / 2
	=	7% / 2
	=	3.5%
Number of semiannual periods	=	Number of years X 2
	=	3 years X 2
	=	6 years
Interest payment	=	$360000 X 3.5%
	=	$       12,600
Semiannual market interest rate	=	8% / 2
	=	4.0%