In: Accounting
Company B issues a ten-year bond that has a face value (or par value) of $100,000 and a stated rate of 4%. The interest is paid annually, the date is January 1, 2018 and the current market rate is 6%.
What is the issue price of the bond (round to the nearest dollar)? Show your work (Using the preset tables)
Correct Answer:
Issue price of bond: $ 85,280
working:
Annual Rate |
Applicable rate |
Face Value |
$ 100,000 |
|||||
Market Rate |
6.00% |
6.00% |
Term (in years) |
10 |
||||
Coupon Rate |
4.00% |
4.00% |
Total no. of interest payments |
10 |
||||
Calculation of Issue price of Bond |
||||||||
Bond Face Value |
Market Interest rate (applicable for period/term) |
|||||||
PV of |
$ 100,000 |
at |
6.00% |
Interest rate for |
10 |
term payments |
||
PV of $1 |
0.5584 |
|||||||
PV of |
$ 100,000 |
= |
$ 100,000 |
x |
0.55840 |
= |
$ 55,840.00 |
A |
Interest payable per term |
at |
4.0% |
on |
$ 100,000 |
||||
Interest payable per term |
$ 4,000 |
|||||||
PVAF of 1$ |
for |
6.0% |
Interest rate for |
10 |
term payments |
|||
PVAF of 1$ |
$ 7.3601 |
|||||||
PV of Interest payments |
= |
$ 4,000.00 |
x |
7.36010 |
= |
$ 29,440.40 |
B |
|
a |
Bond Value (A+B) |
$ 85,280 |
A+B |
End of Answer.
Thanks