On January 1, 2021, Water Wonderland issues $10 million of 7% bonds, due in nine years,...
On January 1, 2021, Water Wonderland issues $10 million of 7%
bonds, due in nine years, with interest payable semiannually on
June 30 and December 31 each year. Use Table 2 and Table 4.
1. If the market rate is 6%, will the bonds issue
at face amount, a discount, or a premium? Calculate the issue
price. (Round "PV Factor" to 5 decimal places. Round other
intermediate calculations and final answer to the nearest dollar
amount. Enter your answer in dollars, not in
millions.)
2. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount. Enter your answer in dollars, not in millions.)
3. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount. Enter your answer in dollars, not in millions.)
Homework Answers
Face Value of Bonds = $10,000,000
Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $10,000,000
Semiannual Coupon = $350,000
Time to Maturity = 9 years
Semiannual Period = 18
Answer 1.
Annual Market Interest Rate = 6.00%
Semiannual Market Interest Rate = 3.00%
Market interest rate is lower than stated interest rate; therefore, bonds will be issued at premium.
Issue Price of Bonds = $350,000 * PVA of $1 (3.00%, 18) +
$10,000,000 * PV of $1 (3.00%, 18)
Issue Price of Bonds = $350,000 * 13.75351 + $10,000,000 *
0.58739
Issue Price of Bonds = $10,687,629
Answer 2.
Annual Market Interest Rate = 7.00%
Semiannual Market Interest Rate = 3.50%
Market interest rate is equal to stated interest rate; therefore, bonds will be issued at par.
Issue Price of Bonds = $350,000 * PVA of $1 (3.50%, 18) +
$10,000,000 * PV of $1 (3.50%, 18)
Issue Price of Bonds = $350,000 * 13.18968 + $10,000,000 *
0.53836
Issue Price of Bonds = $9,999,988 or $10,000,000
Answer 3.
Annual Market Interest Rate = 8.00%
Semiannual Market Interest Rate = 4.00%
Market interest rate is higher than stated interest rate; therefore, bonds will be issued at discount.
Issue Price of Bonds = $350,000 * PVA of $1 (4.00%, 18) +
$10,000,000 * PV of $1 (4.00%, 18)
Issue Price of Bonds = $350,000 * 12.65930 + $10,000,000 *
0.49363
Issue Price of Bonds = $9,367,055
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