Question
In: Accounting
James Corporation is planning to issue $505,000 worth of 10 percent bonds that mature in 4...
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James Corporation is planning to issue $505,000 worth of 10 percent bonds that mature in 4 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014.
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Solutions
Expert Solution
Case A: Market (yield) rate, 8 percent.
Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $25,250[PVIFA 4%, 8 Years] + $505,000[PVIF 4%, 8 Years]
= [$25,250 x 6.7327448] + [$505,000 x 0.7306902]
= $1,70,001.81 + $3,68,998.55
= $5,39,000.36
ISSUE PRICE = $5,39,000.36
Case B: Market (yield) rate, 10 percent.
Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $25,250[PVIFA 5%, 8 Years] + $505,000[PVIF 5%, 8 Years]
= [$25,250 x 6.463212] + [$505,000 x 0.67683936]
= $ 1,63,196.12 + $ 3,41,803.88
= $505,000
ISSUE PRICE = $5,05,000
If the Coupon rate and the Market Yield is same, then the Issue Price will be equal to the Face Value of the Bond
Case C: Market (yield) rate, 12 percent.
Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value
= $25,250[PVIFA 6%, 8 Years] + $505,000[PVIF 6%, 8 Years]
= [$25,250 x 6.209793] + [$505,000 x 0.627412]
= $ 1,56,797.29 + $ 3,16,843.25
= $ 4,73,640.54
ISSUE PRICE = $ 4,73,640.54
ekkarill92 answered 1 year agoRelated Solutions
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