Question

Issue Price

Youngblood Enterprises plans to issue $750,000 face value bonds with a stated interest rate of 10%. They will mature in 5 years. Interest will be paid semiannually. At the date of issuance, assume that the market rate is (a) 10%, (b) 8%, and (c) 12%.

Required:

For each market interest rate, answer the following questions. Round calculations and answers to the nearest whole dollar. Due to differences in rounding when using the present value factors, you need to round your answer for the ISSUE PRICE in the first column only to the nearest 100.

	Market Rate
	10%	8%	12%
1. What is the amount due at maturity?	$	$	$
2. How much cash interest will be paid every six months?	$	$	$
3. At what price will the bond be issued?	$	$	$

Answer 1

Solution:

Computation of bond price
Table values are based on:
n=	10
i=	5%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6139	$750,000	$460,435
Interest (Annuity)	7.7217	$37,500	$289,565
Price of bonds			$750,000

Computation of bond price
Table values are based on:
n=	10
i=	4%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.6756	$750,000	$506,673
Interest (Annuity)	8.1109	$37,500	$304,159
Price of bonds			$810,800

Computation of bond price
Table values are based on:
n=	10
i=	6%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.5584	$750,000	$418,796
Interest (Annuity)	7.3601	$37,500	$276,003
Price of bonds			$694,800

Market Rate	10%	8%	12%
1. What is the amount due at maturity?	$750,000.00	$750,000.00	$750,000.00
2. How much cash interest will be paid every six months?	$37,500.00	$37,500.00	$37,500.00
3. At what price will the bond be issued?	$750,000.00	$810,800.00	$694,800.00