Question

Required information (The following information applies to the questions displayed below.) On January 1, 2021, Frontier World issues $39.0 million of 7% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride.

Answer 1

(1)

coupon interest rate semiannually = 7%/2 = 3.5%

interest on bond = $39,000,000 x 3.5% = $1365000

Issue price = present value of annual interest on bond x present value of principal value on bond

= ($1365000 x 13.59033) + ($39,000,000 x 0.45639)

= $18,550,800.45 + $17,799,210

= $36,350,010

where,

Market interest rate semiannually = 8%/2 = 4%

Number of period = 10 x 2 = 20

PVAF(4%,20) = 13.59033

PVF(4%,20) = 0.45639

(2)

The bond will issue at A discount