Question

080) + $10,000 b. $10,000 x 1.360 x 4 c. ($10,000 x 1.080) + ($10,000 x 1.166) + ($10,000x 1.260) + ($10,000 x 1.360) d. $10,000 x 1.080 x 4 Problem (40 points) On January 1, 2019 Lance Co. issued ten-year bonds with a face value of $1,000,000 and a stated interest rate (coupon rate) of 6% payable annually. The bonds were sold to yield an effective rate (market rate) of 5%. Present value table factors are: Present value of 1 for 10 periods at 5% 61391 Present value of 1 for 10 periods at 6 % 55839 Present value of an ordinary annuity of 10 periods at 5% 7.72173 Present value of an ordinary annuity of 1 for 10 periods at 6% 7.36009 Calculate the issue price of the bonds.

Answer 1

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 1,000,000 x Present value factor (5%,10)

= 1,000,000 x 0.61391

= $613,910

Annual interest payment on bonds = 1,000,000 x 6%

= $60,000

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 60,000 x Present value annuity factor (5%,10)

= 60,000 x 7.72173

= $463,304

Present value of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= $613,910 + $463,304

= $1,077,214

Hence, issue price of bonds = $1,077,214

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