Question

Determine the price of a $300,000 bond issue under each of the following three independent assumptions:

Assumption	Maturity	Interest Paid	Stated Interest Rate	Effective (or Market) Interest Rate
1	10 years	annually	7%	12%
2	10 years	semiannually	8%	12%
3	20 years	semiannually	10%	12%

Explain each answer.

Answer 1

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Issue price of Bond:
Present Value of $300,000	PVF n=10 period, i=7%	0.4440	$       133,204
Present Value of $36, 000	PVAF n=10 period, i=7%	7.9427	$       285,937
(300000*12%)
Issue Price of Bond			$       419,140
Present Value of $300,000	PVF n=20 period, i=4%	0.4564	$       136,916
Present Value of $18, 000	PVAF n=20 period, i=4%	13.5903	$       244,626
(300000*6%)
Issue Price of Bond			$       381,542
Present Value of $300,000	PVF n=40 period, i=5%	0.1420	$         42,614
Present Value of $18, 000	PVAF n=40 period, i=5%	17.1591	$       308,864
(300000*6%)
Issue Price of Bond			$       351,477