Question
In: Accounting
Mind Explorers issues bonds with a stated interest rate of 6%, face value of $190,000, and...
Mind Explorers issues bonds with a stated interest rate of 6%, face value of $190,000, and due in 10 years. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using present value tables, calculate the issue price of the bonds.
Solutions
Expert Solution
| Issue price of bond is | $ 2,04,810 | ||||||||||
| Working: | |||||||||||
| # 1: Calculation of present value factor | |||||||||||
| Present value of annuity of 1 | = | (1-(1+i)^-n)/i | Where, | ||||||||
| = | (1-(1+0.025)^-20)/0.025 | i | = | 2.5% | |||||||
| = | 15.58916229 | n | = | 20 | |||||||
| Present Value of 1 | = | (1+i)^-n | |||||||||
| = | (1+0.025)^-20 | ||||||||||
| = | 0.610270943 | ||||||||||
| # 2 | |||||||||||
| Semi annual coupon | = | Face Value | * | Semi annual coupon rate | |||||||
| = | $ 1,90,000 | * | 3% | ||||||||
| = | $ 5,700 | ||||||||||
| # 3 | |||||||||||
| Present Value of coupon | = | Coupon | * | Present value of annuity of 1 | = | $ 5,700 | * | 15.5892 | = | $ 88,858 | |
| Present Value of Face Value | = | Face Value | * | Present Value of 1 | = | $ 1,90,000 | * | 0.6103 | = | $ 1,15,951 | |
| Total | $ 2,04,810 | ||||||||||
| Price of bond is the present value of cash flows from bond.So, Price of this bond is | $ 2,04,810 |
ekkarill92 answered 2 years agoRelated Solutions
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(1)
(2)
(3)
(4)
Face value
$190,000
(d)
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