A corporation decides to issue 15-year bonds in the amount of $10,000,000. Interest payments will be...

A corporation decides to issue 15-year bonds in the amount of $10,000,000. Interest payments will be made at the rate of 10% compounded semi-annually. The bonds were priced to yield 8% compounded semi-annually to maturity. What is the price of the bonds?

a. $8,462,755 b. $10,000,000 c. $3,083.187 d. $11,729,203

Solutions

Expert Solution

Correct answer-----------d. $11,729,203

Working

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	$ 10,000,000
Market Rate	8.00%	4.00%	Term (in years)	15
Coupon Rate	10.00%	5.00%	Total no. of interest payments	30

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 10,000,000	at	4.00%	Interest rate for	30	term payments
PV of $1	0.30832
PV of	$ 10,000,000	=	$ 10,000,000	x	0.30832	=	$ 3,083,187	A

Interest payable per term	at	5.00%	on	$ 10,000,000
Interest payable per term	$ 500,000

PVAF of 1$	for	4.00%	Interest rate for	30	term payments
PVAF of 1$	17.29203
PV of Interest payments	=	$ 500,000	x	17.29203	=		$ 8,646,017	B

				Bond Value (A+B)			$ 11,729,203

ekkarill92 answered 1 year ago

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