Question

Define the following three types of bond issuances?

                Discount

                Premium

                Par

On July 1, 2012 Poppin Kernels issues $500,000 three year bonds with a coupon of 4%.
At the time of sale the effective Interest is 2%. Interest is to be paid semi annually
What type of bond is it?
What is the present value ($) of the bond?

Principal

Coupon

Real Interest rate

Term

Interest Payment Semi Annually

Interest amount

Present Value interest

Present Value Principal

* Total Present Value of Bond

Answer 1

Discount – bonds are issued for less than face value

Premium – bonds are issued for more than face value

Par – bonds are issued at their face value.

Particulars	Cash flow	Discount factor	Discounted cash flow
present value Interest payments-Annuity (1%,6 periods)	$                 10,000.00	5.79548	$          57,954.76
Present value of bond face amount -Present value (1%,6 periods)	$               500,000.00	0.94205	$        471,022.62
Bond price			$        528,977.38
Face value			$        500,000.00
Premium/(Discount)			$          28,977.38
Interest amount:
Face value	500,000
Coupon/stated Rate of interest	4.000%
Frequency of payment(once in)	6 months
Interest amount	500000*0.04*6/12=		$          10,000.00
Present value calculation:
yield to maturity/Effective rate	2.00%
Effective interest per period(i)	0.02*6/12=		1.000%
Number of periods:
Particulars	Amount
Number of interest payments in a year	2
Years to maturiy	3.0
Number of periods	6

What type of bond is it?	Premium
What is the present value ($) of the bond?	$ 528,977.38
Principal	500000
Coupon	4%
Real Interest rate	2%
Term	3
Interest Payment Semi Annually	10000
Interest amount	10000
Present Value interest	$   57,954.76
Present Value Principal	$ 471,022.62
* Total Present Value of Bond	$ 528,977.38

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