Question

Underwater Experiences issues a bond due in 5 years with a stated interest rate of 6% and a face value of $100,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. What is the issue price of the bond (rounded to nearest whole dollar)?

Answer 1

Face Value = $100,000

Coupon rate = 6%,

Semi annual coupon amount = $100,000 * 6%*6/12 = $3,000

Market rate = 7%, Semi-Annual rate = 3.50%

Issue price of the bond = Present value of all cash flows arising from the bond

Issue price of the bond = [$3,000 * PVAF(3.5% , 10 periods)] + [$100,000 / (1.035)¹⁰]

Issue price of the bond = [$3,000 * 8.31660532] + [$100,000 * 0.708918814]

Issue price of the bond = $24,949.82 + $70,891.88

Issue price of the bond = $95,841.70 or

Issue price of the bond = $95,842 (rounded off to nearest whole number)