Air Destinations issues bonds due in 12 years with a stated interest rate of 12% and...

Air Destinations issues bonds due in 12 years with a stated interest rate of 12% and a face value of $400,000. Interest payments are made semi-annually. The market rate for this type of bond is 13%. Using present value tables, calculate the issue price of the bonds. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)

Expert Solution

	Issue price of bond is		$ 3,76,018.52

Working:

# 1: Calculation of present value factor

Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
			=	(1-(1+0.065)^-24)/0.065	i	=	6.5%
			=	11.99073871		n	=	24

Present Value of 1		=	(1+i)^-n
			=	(1+0.065)^-24
			=	0.220601984

# 2

Semi annual coupon		=	Face Value	*	Semi annual coupon rate
			=	$ 4,00,000	*	6%
			=	$ 24,000

# 3
Present Value of coupon	=	Coupon	*	Present value of annuity of 1	=	$ 24,000	*	11.9907	=	$ 2,87,777.73
Present Value of Face Value	=	Face Value	*	Present Value of 1	=	$ 4,00,000	*	0.2206	=	$ 88,240.79

Total											$ 3,76,018.52

Price of bond is the present value of cash flows from bond.So, Price of this bond is		$ 3,76,018.52

ekkarill92 answered 2 years ago

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