Young Co. issues $600,000 of 12% bonds dated January 1, 2021. Interest is payable semiannually on...

Young Co. issues $600,000 of 12% bonds dated January 1, 2021. Interest is payable semiannually on June 30 and December 31. The bonds mature in 9 years. The current market rate for similar bonds is 7%.

What is the issue price of the bonds?

#49

Solutions

Expert Solution

Price of bond = $ 797,845

The final answer maybe different for 2-3 digits due to round off in PV factors.

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Annual Rate	Applicable rate	Face Value	$ 600,000
Market Rate	7.00%	3.50%	Term (in years)	9
Coupon Rate	12.00%	6.00%	Total no. of interest payments	18

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 600,000	at	3.50%	Interest rate for	18	term payments
PV of $1	0.53836
PV of	$ 600,000	=	$ 600,000	x	0.53836	=	$ 323,017	A

Interest payable per term	at	6.00%	on	$ 600,000
Interest payable per term	$ 36,000

PVAF of 1$	for	3.50%	Interest rate for	18	term payments
PVAF of 1$	13.18968
PV of Interest payments	=	$ 36,000	x	13.18968	=		$ 474,829	B

				Bond Value (A+B)			$ 797,845

ekkarill92 answered 1 year ago

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