Question

Required information The following information applies to the questions displayed below) int 2 of 3 On January 1, 2021, Water World issues $25.6 million of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Water World intends to use the funds to build the world's largest water avalanche and the tornado- a giant outdoor vortex in which riders spin in progressively smaller and faster circles until they drop through a small tunnel at the bottom 2.a. If the market rate is 6%, calculate the issue price. (FV of 51. PV of $1. EVA of S1, and PVA of S1 (Use appropriate factor(s) from the tables provided. Do not round interest rate factors. Round Market interest rate to 1 decimal place. Enter your answers in dollars not in millions. Round your final answers to the nearest whole dollar.) rence Amount Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate

Answer 1

Face amount = $25,600,000
Interest payment ($25,600,000 * 6% *6/12) = $768,000
Periods to maturity (20 years * 2) = 40
Market Interest rate = 6%
Issue price = $25,600,000

When the coupon rate and market interest rate is same, the issue price of bonds will always be equal to its Face value because the present value of all future payments from bonds will be going to same as face value and here both coupon rate and market interest rate is same as 6%. This can also be calculated as:

Issue price = Present value of coupon payments + Present value of maturity amount
= ($768,000 * PVAF 3% 40 periods) + ($25,600,000 * PVF 3% 40 periods)
= ($768,000 * 23.11477) + ($25,600,000 * 0.30656)
= $25,600,000