Question

Coronado Corporation issues $410,000 of 9% bonds, due in 9 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Issue price of the bonds

Answer 1

Semi - Annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 410,000 x 9% x 6/12

= $18,450

Market interest rate = 10% annual

Semi annual Market interest rate = 5%

Maturity period of bonds = 9 years or 18 semi annual periods

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 410,000 x Present value factor (5%, 18)

= 410,000 x 0.41552

= $170,363

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 18,450 x Present value annuity factor (5%, 18)

= 18,450 x 11.68959

= $215,673

Issue price of bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 170,363 + 215,673

= $386,036