Company B issues a ten-year bond that has a face value (or par value) of $100,000...

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)

Expert Solution

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

ekkarill92 answered 2 years ago

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