Question

A company issues bonds with a par value of $800,000 on their issue date. The bonds mature in 5 years and pay 6% annual interest in two semiannual payments. On the issue date, the market rate of interest is 8%. Compute the price of the bonds on their issue date. $864,858 $800,000 $735,142 $736,464

Answer 1

$735,142

Working:

Price of bond is the present value of cash flow from bond.
Present Value of Coupon interest				$       1,94,662
Present Value of Par Value				$       5,40,480
Price of bond				$       7,35,142
Working;
a.	Par Value of bond			8,00,000
b.	Semi annual coupon interest			=	8,00,000	x	3%	=	24,000
c.	Present Value of annuity of 1			=	(1-(1+i)^-n)/i			Where,
				=	(1-(1+0.04)^-10)/0.04			i	4%
				=	8.1109			n	10
d.	Present Value of 1			=	(1+i)^-n
				=	(1+0.04)^-10
				=	0.6756
e.	Present Value of coupon				24,000	x	8.1109	=	1,94,662
	Present Value of Par Value				8,00,000	x	0.6756	=	5,40,480
	Present Value of Cash flow from bond								7,35,142