On January 1, 2014, Giamartino, Inc. issues a 4-year bond with a face value of $100,000....

On January 1, 2014, Giamartino, Inc. issues a 4-year bond with a face value of $100,000. The semi-annual interest payments of $6,000 are due July 1 and January 1 of each year.

Coupon Rate (or Stated Rate)	12%
Market Interest Rate at Issuance	10%

Discount Rate	No. of Periods/No. of Payments	Time Value Factor Present Value of $1 Lump Sum	Time Value Factor Present Value of Ordinary Annuity
12%	4	0.6355	3.0373
10%	4	0.6830	3.1699
6%	8	0.6274	6.2098
5%	8	0.6768	6.4632

What is the present value of the bond on the date of issuance?

Solutions

Expert Solution

Concepts

Bonds issue price or Present Value is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

Data

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	10.0%	5.0%
Coupon Rate	12.0%	6.0%

Face Value	$ 100,000.00
Term (in years)	4
Total no. of interest payments	8

Hence, you have to look for 5% (Applicable market interest) for 8 periods
Answer

	Amount	PV factor	Present Values
PV of Face Value of	$ 100,000.00	0.6768 [PV of $1]	$ 67,680.00
PV of Interest payments of	$ 6,000.00	6.4632 [PV of Annuity $1]	$ 38,779.20
Issue Price of Bonds			$ 106,459.20 or $ 106,459 = Answer

Present Value of Bond = $ 106,459.20 or $ 106,459

ekkarill92 answered 2 weeks ago

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