Question

Christmas Anytime issues $800,000 of 7% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. Calculate the issue price of a bond and complete the first three rows of an amortization schedule when:

1. The market interest rate is 7% and the bonds issue at face amount

2. The market interest rate is 8% and the bonds issue at a discount.

3.. The market interest rate is 6% and the bonds issue at a premium

Answer 1

Correct Answer:

1: Issue price of the bond @ 7% Market rate of interest = $ 800,00

Working:

		Annual Rate	Applicable rate		Face Value	$           800,000
	Market Rate	7.00%	3.50%		Term (in years)	15
	Coupon Rate	7.00%	3.50%		Total no. of interest payments	30
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                     800,000	at	3.50%	Interest rate for	30	term payments
PV of $1	0.35628
PV of	$                     800,000	=	$                  800,000	x	0.35628	=	$                 285,022.73	A
Interest payable per term	at	3.5%	on	$                          800,000
Interest payable per term	$                       28,000
PVAF of 1$	for	3.5%	Interest rate for	30	term payments
PVAF of 1$	$                   18.39205
PV of Interest payments	=	$        28,000.00	x	18.39205	=	$                 514,977.27	B
			a	Bond Value (A+B)	$                       800,000

2: Issue price of the bond @ 8% Market rate of interest = $ 730,832

Working:

		Annual Rate	Applicable rate		Face Value	$           800,000
	Market Rate	8.00%	4.00%		Term (in years)	15
	Coupon Rate	7.00%	3.50%		Total no. of interest payments	30
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$                     800,000	at	4.00%	Interest rate for	30	term payments
PV of $1	0.30832
PV of	$                     800,000	=	$                  800,000	x	0.30832	=	$                 246,654.93	A
Interest payable per term	at	3.5%	on	$                           800,000
Interest payable per term	$                       28,000
PVAF of 1$	for	4.0%	Interest rate for	30	term payments
PVAF of 1$	$                   17.29203
PV of Interest payments	=	$        28,000.00	x	17.29203	=	$                 484,176.93	B
			a	Bond Value (A+B)	$                       730,832

3: Issue price of the bond @ 6% Market rate of interest = $ 878,402

Working:

		Annual Rate	Applicable rate		Face Value	$           800,000
	Market Rate	6.00%	3.00%		Term (in years)	15
	Coupon Rate	7.00%	3.50%		Total no. of interest payments	30
Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
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