Mufala, Inc., will issue $10,000,000 of 6% 10-year bonds. The market rate for bonds with similar...

Mufala, Inc., will issue $10,000,000 of 6% 10-year bonds. The market rate for bonds with similar risk and maturity is 8%. Interest will be paid by Mufala semiannually. What is the issue price of the bonds? (Refer to the appropriate table in the Present and Future Value Tables section of your tex

Issue price of the bonds__________ ?

Solutions

Expert Solution

Issue Price of the Bond

The Issue Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = $10,000,000

Semi-annual Coupon Amount = $300,000 [$10,000,000 x 6% x ½]

Semi-annual Yield to Maturity = 4.00% [8.00% x ½]

Maturity Period = 20 Years [10 Years x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= $300,000[PVIFA 4.00%, 20 Years] + $10,000,000[PVIF 4.00%, 20 Years]

= [$300,000 x 13.59033] + [$10,000,000 x 0.45639]

= $4,077,099 + $4,563,900

= $8,640,999

“Therefore, the Issue Price of the Bond will be $8,640,999”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.

ekkarill92 answered 1 year ago

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