In: Accounting
On January 1, 2018, Rare Bird Ltd. purchased 15% bonds dated January 1, 2018, with a face amount of $28 million. The bonds mature in 2027 (10 years). For bonds of similar risk and maturity, the market yield is 14%. Interest is paid semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)
Required: Determine the price of the bonds at January 1, 2018.
Particulars | Cash flow | Discount factor | Discounted cash flow | |
Interest payments-Annuity (7%,20 periods) | 2,100,000.0 | 10.5940 | 22,247,429.92 | |
Principle payments -Present value (7%,20 periods) | 28,000,000 | 0.2584 | 7,235,732.08 | |
A | Bond price | 29,483,161.99 | ||
Face value | 28,000,000.00 | |||
Premium/(Discount) | 1,483,161.99 | |||
Interest amount: | ||||
Face value | 28,000,000 | |||
Coupon/stated Rate of interest | 15.00% | |||
Frequency of payment(once in) | 6 months | |||
B | Interest amount | 28000000*0.15*6/12= | 2100000 | |
Present value calculation: | ||||
yield to maturity/Effective rate | 14.00% | |||
Effective interest per period(i) | 0.14*6/12= | 7.000% | ||
Number of periods: | ||||
Ref | Particulars | Amount | ||
a | Number of interest payments in a year | 2 | ||
b | Years to maturiy | 10.0 | ||
c=a*b | Number of periods | 20 |
Bond price is 29,483,161.99