Question

Required information [The following information applies to the questions displayed below.) On January 1, 2021, Frontier World issues $39.3 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. Required: 1-a. If the market rate is 6%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors. Enter your answers in dollars not in millions. Round "Market interest rate" to 1 decimal place. Round your final answers to the nearest whole dollar.) Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate $ $ Amount 39,300,000 1,375,500 Issue price

Answer 1

Issue price of bond = present value of principal value on bond + present value of interest on bond

= {$39,300,000 x PVF(3%, 20)} + {$1,375,500 x PVAF(3%, 20)}

= ($39,300,000 x 0.55368) + ($1,375,500 x 14.87747)

= $21,759,624 + $20,463,959.985

= $42,223,584

where,

Coupon rate = 7%/2 = 3.5% semiannually

interest on bond = $39,300,000 x 3.5% = $1,375,500

Market interest rate = 6%/2 = 3% semiannually

Time period = 10 x 2 = 20

Therefore,

PVF(3%, 20) = 0.55368

PVAF(3%, 20) = 14.87747