Question

ames Corporation is planning to issue bonds with a face value of $507,500 and a coupon rate of 6 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required: Compute the issue (sale) price on January 1 of this year for each of the following independent cases: a. Case A: Market interest rate (annual): 4 percent. b. Case B: Market interest rate (annual): 6 percent. c. Case C: Market interest rate (annual): 8.5 percent.

Answer 1

Correct Answer:

Case A : market Rate of interest : 4% annually.

Issue price

$      5,90,484

Working:

Semi-Annually		Formula Applied
Face Value of Bond	$                         5,07,500
Interest Semi-Annually @ 6%	$                            15,225	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate r = ( 4%/2)	0.020	4%
Time Period (n) 10 years	20.00	10 Years ( 20 Periods)
Present Value of Face Value of Bond	$            3,41,532.95155	Face Value/(1+r%)^2n
Present Value of Interest payment	$                   2,48,950.57	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                         5,90,484	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                            82,984	Issue Price - Face Value of Bonds

Case B: market Rate of interest: 6% annually.

Issue Price Of Bond

$ 5,07,500

Working:

Semi-Annually		Formula Applied
Face Value of Bond	$                         5,07,500
Interest Semi-Annually @ 6%	$                            15,225	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate r = ( 4%/2)	0.030	6%
Time Period (n) 10 years	20.00	10 Years ( 20 Periods)
Present Value of Face Value of Bond	$            2,80,990.44525	Face Value/(1+r%)^2n
Present Value of Interest payment	$                   2,26,509.55	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                         5,07,500	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                                      -	Issue Price - Face Value of Bonds

Case B: market Rate of interest: 8.5% annually.

Issue Price Of Bond

$                         4,23,164

Semi-Annually		Formula Applied
Face Value of Bond	$                         5,07,500
Interest Semi-Annually @ 6%	$                            15,225	(Face Value of Bonds * Coupon rate )
Semi-Annual Effective interest Rate r = ( 8.5%/2)	0.0425	8.5%
Time Period (n) 10 years	20.00	10 Years ( 20 Periods)
Present Value of Face Value of Bond	$            2,20,757.14747	Face Value/(1+r%)^2n
Present Value of Interest payment	$                   2,02,406.72	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$                         4,23,164	PV of Face value of bond + PV of Interest Paid Annually
Premium or (Discount)	$                          (84,336)	Issue Price - Face Value of Bonds

                                                      

End of answer.

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