Homework Answers
Issue price of Bonds = $468,845
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 | $ 500,000 | ||
| 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 | $ 5,00,000 | at | 5.00% | Interest rate for | 20 | term payments | ||
| PV of $1 | 0.37689 | |||||||
| PV of | $ 5,00,000 | = | $ 500,000 | x | 0.37689 | = | $ 188,445 | A |
| Interest payable per term | at | 4.50% | on | $ 500,000 | ||||
| Interest payable per term | $ 22,500 | |||||||
| PVAF of 1$ | for | 5.00% | Interest rate for | 20 | term payments | |||
| PVAF of 1$ | 12.46221 | |||||||
| PV of Interest payments | = | $ 22,500 | x | 12.46221 | = | $ 280,400 | B | |
| Bond Value (A+B) | $ 468,845 | |||||||
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