Question

Novak Corporation issues $550,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

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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 0 decimal places e.g. 58,971.)

Issue price of the bonds$enter the issue price of the bonds rounded to 0 decimal places

Answer 1

Issue Price of the Bond

Par Value of the bond = $550,000

Semi-annual coupon amount = $24,750 [$550,000 x 9.00% x ½]

Semi-annual Yield to Maturity = 4.50% [9.00% x ½]

Maturity Period = 18 Years (9 Years x 2)

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $24,750[PVIFA 4.50%, 18 Years] + $550,000[PVIF 4.50%, 18 Years]

= [$24,750 x 11.68959] + [$550,000 x 0.41552]

= $ 289,317 + $ 228,536

= $517,853

Hence, the Issue Price of the Bond will be $517,853

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.