In: Accounting
James Corporation is planning to issue $500,000 worth of 6 percent bonds that mature in 10 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) |
Required: |
Compute the issue (sale) price on January 1, 2014, for each of the following independent cases: |
a. |
Case A: Market (yield) rate, 4 percent. |
b. |
Case B: Market (yield) rate, 6 percent. |
c. |
Case C: Market (yield) rate, 8.5 percent. |
Issue price of bond is calculated using below formula:
=present value of all interest payment received + present value of bond at maturity
In the given question, intersest will be paid half yearly on june 30 and dec 31, so value of each variable will changed accordingly
Note: As discount factor table is not provided in question, so have used table generally availabe online.
a) Case A -Market Yield is 4 percent
Period | Cash flow | Amount | Discound factor (2%) |
Present value (cash flow* DF) |
---|---|---|---|---|
1-20 | Interest | 15000 | 16.3514 | 245271 |
20 | Bond Maturity value | 500000 | 0.6730 | 336500 |
Issue price of Bond | $ 581771 |
b) Case B: Market (yield) rate, 6 percent.
Period | Cash flow | Cash flow | Discound factor (3%) | Present value (cash flow*discount factor) |
---|---|---|---|---|
1-20 | Interest | 15000 | 14.8775 | 223163 |
20 | Bond Maturity value | 500000 | 0.5537 | 276850 |
Issue price of Bond | $ 500013 |
c) Case C: Market (yield) rate, 8.5 percent.
Period | Cash flow | Cash flow | Discound factor (4.25%) | Present value (cash flow*discount factor) |
---|---|---|---|---|
1-20 | Interest | 15000 | 13.2944 | 199416 |
20 | Bond Maturity value | 500000 | 0.4350 | 217500 |
Issue price of Bond | $ 416916 |