Question

In: Accounting

James Corporation is planning to issue $500,000 worth of 6 percent bonds that mature in 10...

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.


     

Solutions

Expert Solution

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

  • rate of interest= 6%/2= 3% , interest payment per period will be= 500000*3%= 15000
  • time period= 10*2= 20 and
  • yield 4%/2= 2%; 6%/2=3 %; 8.5%/2=4/25% in case respectively.

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

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