E10-4 Computing Issue Prices of Bonds Sold at Par, at a Discount, and at a Premium...

E10-4 Computing Issue Prices of Bonds Sold at Par, at a Discount, and at a Premium LO10-2, 10-4, 10-5

James Corporation is planning to issue bonds with a face value of $508,500 and a coupon rate of 6 percent. The bonds mature in 7 years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required:

Compute the issue (sale) price on January 1 of this year for each of the following independent cases:

a. Case A: Market interest rate (annual): 4 percent.

b. Case B: Market interest rate (annual): 6 percent.

c. Case C: Market interest rate (annual): 8.5 percent.

Expert Solution

	We have the following informations:
	Face Value = $508,500
	Coupon Rate = 3.00%
	No. of payments = 14(7years*2 payments each year)
	Coupon Amount = $508,500*3% =$15,225
	Maturity Amount = $508,500+15,225 = 523,725

Case A:Market Interest Rate is 4%	The market interest rate (Semi-annual) will be 2%
	So discounting will be done @2% for 14 period:
Years(a)	Coupon amount + Face value(b)	Discounting Factor @ 2%(c)	Discounted amount(b*c)
1	15,225	0.9804	14927
2	15,225	0.9612	14634
3	15,225	0.9422	14345
4	15,225	0.9238	14065
5	15,225	0.9057	13789
6	15,225	0.8880	13520
7	15,225	0.8706	13255
8	15,225	0.8535	12995
9	15,225	0.8368	12740
10	15,225	0.8203	12489
11	15,225	0.8043	12245
12	15,225	0.7885	12005
13	15,225	0.7730	11769
14	523725	0.7579	396931
	Issue price of Bond(at premium)		569709

Case B:Market Interest Rate is 6%	The market interest rate (Semi-annual) will be 3%
	So discounting will be done @3% for 14 period:
Years(a)	Coupon amount + Face value(b)	Discounting Factor @ 2%(c)	Discounted amount(b*c)
1	15,225	0.9709	14782
2	15,225	0.9426	14351
3	15,225	0.9151	13933
4	15,225	0.8885	13527
5	15,225	0.8626	13133
6	15,225	0.8375	12751
7	15,225	0.8131	12379
8	15,225	0.7894	12019
9	15,225	0.7664	11669
10	15,225	0.7441	11329
11	15,225	0.7224	10999
12	15,225	0.7014	10679
13	15,225	0.6810	10367
14	523725	0.6611	346244
	Issue price of Bond		508500

Case B:Market Interest Rate is 8.50%	The market interest rate (Semi-annual) will be 4.25%
	So discounting will be done @4.25% for 14 period:
Years(a)	Coupon amount + Face value(b)	Discounting Factor @ 2%(c)	Discounted amount(b*c)
1	15,225	0.9592	14604
2	15,225	0.9201	14009
3	15,225	0.8826	13438
4	15,225	0.8466	12890
5	15,225	0.8121	12365
6	15,225	0.7790	11860
7	15,225	0.7473	11377
8	15,225	0.7168	10913
9	15,225	0.6876	10468
10	15,225	0.6595	10041
11	15,225	0.6326	9632
12	15,225	0.6069	9239
13	15,225	0.5821	8863
14	523725	0.5584	292441
	Issue price of Bond(at discount)		442141

ekkarill92 answered 4 months ago

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