Question

Maggie, Inc. Issued a 10 year, $100,000 face bond with a 10% interest rate. The bond pays the interest for 10 years and then pays the principal of $100,000 at the end of the 10th year. (Solve 1-3)

1.) If the current interest rates are 10% at the time of the issue, on the date of the issue Maggie Inc. will receive:

a.) $100,000

b.) $91,954.77

c.) $73,734.81

d.) $88,699.55

2.) If the current interest rates are 12% at the time of issue, on the date of issue Maggie Inc. will receive:

a.) $104,986.81

b.) $113.420.16

c.) $88,699.55

d.) $100,000

3.) If the current interest rates are 8% at the time of the issue, on the date of the issue Maggie Inc. will receive:

a.) $104,986.81

b.) $113.420.16

c.) $77,399.11

d.) $100,000

Answer 1

Current price of bond = coupon amount * PVIFA(maket interest rate, no. of years to maturity) + redemption/maturity value*PVIF(maket interest rate, no. of years to maturity)

Given information - Par value = $ 100000

Coupon rate = 10%

coupon amout per year = 100000*10% = 10000

maturity period = 10 Years

Answer to Part 1

market interest rate = 10%

current price of bond = 10000*PVIFA(10%,10) + 100000*PVIF(10%,10)

= 10000*6.144567 + 100000*0.385543

= 61445.70 + 38554.3

= 100000

so the correct option will be (a). Maggie inc. should be received $ 100000.

Answer to Part 2

market interest rate = 12%

current price of bond = 10000*PVIFA(12%,10) + 100000*PVIF(12%,10)

= 10000*5.650223 + 100000*0.321973

= 56502.23 + 32197.3

= 88699.53

so the correct option is (c), Maggie should be received $ 88699.55.

Answer to Part 3

market interest rate = 8%

current price of bond = 10000*PVIFA(8%,10) + 100000*PVIF(8%,10)

= 10000*6.710081 + 100000*0.463193

= 67100.81 + 46319.3

= 113420.1

correct option should be (b), maggie should be received $ 113420.16.

Please check with your answer and let me know.