Question

Question 5 0/1 View Policies Show Attempt History Current Attempt in Progress 4 Your answer is incorrect. Cullumber Corporation issues $520,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Click here to view factor tables. Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to O decimal places e.g. 58,971.) Issue price of the bonds $

Answer 1

Issue price of Bond = $487,599

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 520,000
Market Rate	10.00%	5.00%		Term (in years)	10
Coupon Rate	9.00%	4.50%		Total no. of interest payments	20

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$           5,20,000	at	5.00%	Interest rate for	20	term payments
PV of $1	0.37689
PV of	$           5,20,000	=	$ 520,000	x	0.37689	=	$ 195,983	A
Interest payable per term	at	4.50%	on	$ 520,000
Interest payable per term	$ 23,400
PVAF of 1$	for	5.00%	Interest rate for	20	term payments
PVAF of 1$	12.46221
PV of Interest payments	=	$ 23,400	x	12.46221	=		$ 291,616	B
				Bond Value (A+B)			$ 487,599