Question

Case C: James Corporation is planning to issue $1,060,000 worth of bonds with a coupon rate of 5 percent. The bonds mature in 10 years and pay interest annually. All of the bonds were sold on January 1 of this year. Required: 1. Assume market (yield) rate, 5 percent. Compute the issue (sale) price on January 1 of this year. 2. Assume market (yield) rate, 4 percent. Compute the issue (sale) price on January 1 of this year. 3. Assume market (yield) rate, 6 percent. Compute the issue (sale) price on January 1 of this year. Issue price Issue price Issue price 3.

Answer 1

Issue Price on January 1 is as shown below:

1. Issue Price is:

Table values are based on:
n = 10
i = 5%
Cash Flow	Table Value	Amount	Present Value
Interest	7.722	53,000	409,252
Principal	0.614	1,060,000	650,748
Issue Price			1,060,000

2. Issue Price is:

Table values are based on:
n = 10
i = 4%
Cash Flow	Table Value	Amount	Present Value
Interest	8.111	53,000	429,877
Principal	0.676	1,060,000	716,098
Issue Price			1,145,975

3. Issue Price is:

Table values are based on:
n = 10
i = 6%
Cash Flow	Table Value	Amount	Present Value
Interest	7.360	53,000	390,085
Principal	0.558	1,060,000	591,898
Issue Price			981,983