Question

Issue Price

The following terms relate to independent bond issues:

1. 420 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments
2. 420 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments
3. 820 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments
4. 2,190 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments

Use the appropriate present value table:

PV of $1 and PV of Annuity of $1

Required:

Assuming the market rate of interest is 10%, calculate the selling price for each bond issue. If required, round your intermediate calculations and final answers to the nearest dollar.

Situation	Selling Price of the Bond Issue
a.	$fill in the blank 1
b.	$fill in the blank 2
c.	$fill in the blank 3
d.	$fill in the blank 4

Answer 1

Correct Answer:

A: $ 388,157

Working:

Annually		Formula Applied
Face Value of Bond	$             420,000
Interest Semi-Annually @ 8%	$               33,600	(Face Value of Bonds * Coupon rate ) / 2
Semi-Annual Effective interest Rate r = ( 10%)	0.1000	10.0%
Time Period (n) 5 years	5.00	5
Present Value of Face Value of Bond	$             260,787	Face Value/(1+r%)^2n
Present Value of Interest payment	$             127,370	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$         388,157.4	PV of Face value of bond + PV of Interest Paid Annually

B: $ 387,569

Working:

semi-Annually		Formula Applied
Face Value of Bond	$             420,000
Interest Semi-Annually @ 8%	$               16,800	(Face Value of Bonds * Coupon rate ) / 2
Semi-Annual Effective interest Rate r = ( 10%)	0.0500	10.0%
Time Period (n) 5 years	10.00	5
Present Value of Face Value of Bond	$             257,844	Face Value/(1+r%)^2n
Present Value of Interest payment	$             129,725	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$             387,569	PV of Face value of bond + PV of Interest Paid Annually

C: $ 717,810

Working:

semi-Annually		Formula Applied
Face Value of Bond	$             820,000
Interest Semi-Annually @ 8%	$               32,800	(Face Value of Bonds * Coupon rate ) / 2
Semi-Annual Effective interest Rate r = ( 10%)	0.0500	10.0%
Time Period (n) 10 years	20.00	10
Present Value of Face Value of Bond	$             309,049	Face Value/(1+r%)^2n
Present Value of Interest payment	$             408,760	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$             717,810	PV of Face value of bond + PV of Interest Paid Annually

D:

Working:

semi-Annually		Formula Applied
Face Value of Bond	$             820,000
Interest Semi-Annually @ 12%	$               49,200	(Face Value of Bonds * Coupon rate ) / 2
Semi-Annual Effective interest Rate r = ( 10%)	0.0500	10.0%
Time Period (n) 15 years	30.00	15
Present Value of Face Value of Bond	$             189,730	Face Value/(1+r%)^2n
Present Value of Interest payment	$             756,325	Interest * ((1-(1+r)^-n)/r)
Issue Price Of Bond	$             946,054	PV of Face value of bond + PV of Interest Paid Annually

End of answer.

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