Question

Required information [The following information applies to the questions displayed below.) On January 1, 2021, Frontier World issues $40.8 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 $ 40,800,000 Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate Issue price 1-b. The bonds will issue at A Discount A Premium Face amount

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$4,08,00,000
	Annual Coupon %			7.00%
	Annual Coupon Amount			$28,56,000.00
	Semi Annual Coupon Amount			$14,28,000.00
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 6%
	Bonds interest is paid semi annualy means so discounting factor = 6 % /2= 3 %
	PVF = 1 / Discount rate = 1/ 1.03
	Result of above will again divide by 1.03 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 3%	PresentValue
	1	Interest	$14,28,000.00	0.9709	$13,86,408
	2	Interest	$14,28,000.00	0.9426	$13,46,027
	3	Interest	$14,28,000.00	0.9151	$13,06,822
	4	Interest	$14,28,000.00	0.8885	$12,68,760
	5	Interest	$14,28,000.00	0.8626	$12,31,805
	6	Interest	$14,28,000.00	0.8375	$11,95,928
	7	Interest	$14,28,000.00	0.8131	$11,61,095
	8	Interest	$14,28,000.00	0.7894	$11,27,276
	9	Interest	$14,28,000.00	0.7664	$10,94,443
	10	Interest	$14,28,000.00	0.7441	$10,62,566
	11	Interest	$14,28,000.00	0.7224	$10,31,618
	12	Interest	$14,28,000.00	0.7014	$10,01,570
	13	Interest	$14,28,000.00	0.6810	$9,72,399
	14	Interest	$14,28,000.00	0.6611	$9,44,076
	15	Interest	$14,28,000.00	0.6419	$9,16,579
	16	Interest	$14,28,000.00	0.6232	$8,89,882
	17	Interest	$14,28,000.00	0.6050	$8,63,963
	18	Interest	$14,28,000.00	0.5874	$8,38,799
	19	Interest	$14,28,000.00	0.5703	$8,14,368
	20	Interest	$14,28,000.00	0.5537	$7,90,649
	20	Bond Principal Value	$4,08,00,000.00	0.5537	$2,25,89,971
		Total			$4,38,35,005
		Current Bonds Price =			$4,38,35,005
	ANSWER = 1 (A)
		Bond Characteristics	Amount
		Face Amount	$4,08,00,000
		Interest Payment	$2,85,60,000
		Period to Maturity	20 Period
		Market interest Rate	6%
		Issue Price	$4,38,35,005
	ANSWER = 1 (B)
		Bonds will be issued at discount because market rate of interest is lower than bonds coupon rate
		Answer = Option A = Discount