Question

In: Finance

A 15​-year bond issue of 5,100,000 and bearing interest at 4​% payable annually is sold to...

A 15​-year bond issue of 5,100,000 and bearing interest at 4​% payable annually is sold to yield 4.4​% compounded semi-annually. What is the issue price of the​ bonds?

Solutions

Expert Solution

Issue Price of the Bond

  • The Issue Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.
  • The Price of the Bond is normally calculated either by using EXCEL Functions or by using Financial Calculator.
  • Here, the calculation of the Bond Price using financial calculator is as follows

Variables

Financial Calculator Keys

Figures

Par Value/Face Value of the Bond [$5,100,000]

FV

5,100,000

Coupon Amount [$5,100,000 x 4.00% x ½]

PMT

102,000

Market Interest Rate or Yield to maturity on the Bond [4.40% x ½]

1/Y

2.20

Maturity Period/Time to Maturity [15 Years x 2]

N

30

Bond Price

PV

?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the Price of the Bond = $4,877,715.48

“Hence, the Issue Price of the Bond will be $4,877,715.48”


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