Question

James Corporation is planning to issue $513,000 worth of 8 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. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.) Required: Compute the issue (sale) price on January 1, 2014, for each of the following independent cases:

a. Case A: Market (yield) rate, 6 percent.

b. Case B: Market (yield) rate, 8 percent.

c. Case C: Market (yield) rate, 10 percent.

Answer 1

Case A

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (3%,8 periods)	20,520.0	7.0197	144,044.08
	Principle payments -Present value (3%,8 periods)	513,000	0.7894	404,966.94
A	Bond price			549,011.02
	Face value			513,000.00
	Premium/(Discount)			36,011.02
	Interest amount:
	Face value	513,000
	Coupon/stated Rate of interest	8.00%
	Frequency of payment(once in)	6 months
B	Interest amount	513000*0.08*6/12=		20520
	Present value calculation:
	yield to maturity/Effective rate	6.00%
	Effective interest per period(i)	0.06*6/12=		3.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	4.0
c=a*b	Number of periods	8

Case B

when coupon rate equals YTM, issue price is its face value that is $513,000

Case C:

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (5%,8 periods)	20,520.0	6.4632	132,625.13
	Principle payments -Present value (5%,8 periods)	513,000	0.6768	347,218.59
A	Bond price			479,843.72
	Face value			513,000.00
	Premium/(Discount)			-33,156.28
	Interest amount:
	Face value	513,000
	Coupon/stated Rate of interest	8.00%
	Frequency of payment(once in)	6 months
B	Interest amount	513000*0.08*6/12=		20520
	Present value calculation:
	yield to maturity/Effective rate	10.00%
	Effective interest per period(i)	0.1*6/12=		5.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	4.0
c=a*b	Number of periods	8