Question

a. ABC Co. issues $100,000, 4%, 10 year bonds when the prevailing market rate of interest is 5%. The bonds pay interest annually. Compute the issue price of the bonds.

b. ABC Co. issues $100,000, 4%, 10 year bonds when the prevailing market rate of interest is 5%. The bonds pay interest semi-annually. Compute the issue price of the bonds.

c. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest annually. Compute the issue price of the bonds.

d. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest semi-annually. Compute the issue price of the bonds.

Answer 1

Price of the bond = c × F × (1 ? (1 + r)-t)/r+F(1 + r)t
C=Interest Rate	F= Face Value	r=Market Interest Rate
Price of Bond= Present value of Interest payments+Present value of the bond
discount factor taken upto 5 decimal taken
ans 1
Price of Bond	4000*(1-(1.05)^-10)/.05)+100000/(1.05)^10
	(4000*(1-.61391)/.05)+100000*.61391		92278
Interest paid (100000*4%)	$4,000
No. of period	10
Price of the bonds	$92,278
ans 2
Price of Bond	2000*(1-(1.025)^-20)/.05)+100000/(1.025)^20
	(2000*(1-.61027)/.025)+100000*.61027		92205
Interest paid (100000*4%*6/12)	$2,000
No. of period (10*2)	20
Price of the bonds	$92,205
ans 3
Price of Bond	10000*(1-(1.09)^-10)/.09)+100000/(1.09)^10
	(10000*(1-.42241)/.09)+100000*.42241		106418
Interest paid (100000*10%)	$10,000
No. of period	10
Price of the bonds	$106,418
ans 4
Price of Bond	5000*(1-(1.045)^-20)/.045)+100000/(1.045)^10
	(5000*(1-.41464)/.045)+100000*.41464		106504
Interest paid (100000*10%*6/12)	$5,000
No. of period (10*2)	20
Price of the bonds	$106,504