In: Accounting
Issue Price of
a Bond
Maggie Enterprises issued $110,000 of 6%, 5-year bonds with
interest payable semiannually. Determine the issue price if the
bonds are priced to yield (a) 6%, (b) 8%, and (c) 4%.
Use financial calculator or Excel to calculate answers. Round answers to the nearest whole number.
a.) | Answer |
b.) | Answer |
c.) | Answer |
Correct Answer:
A: The issue price if the bonds are priced to yield @ 6%, $ 110,000
semi-Annually |
Formula Applied |
|
Face Value of Bond |
$ 110,000 |
|
Interest Semi-Annually @ 6% |
$ 3,300 |
(Face Value of Bonds * Coupon rate ) / 2 |
Semi-Annual Effective interest Rate r = ( 6%) |
0.0300 |
6.0% |
Time Period (n) 5 years |
10.00 |
5 |
Present Value of Face Value of Bond |
$ 81,850 |
Face Value/(1+r%)^2n |
Present Value of Interest payment |
$ 28,150 |
Interest * ((1-(1+r)^-n)/r) |
Issue Price Of Bond |
$ 110,000 |
PV of Face value of bond + PV of Interest Paid Annually |
Premium or (Discount) |
$ - |
Issue Price - Face Value of Bonds |
B: The issue price if the bonds are priced to yield @ 8%, $ 101,078.
semi-Annually |
Formula Applied |
|
Face Value of Bond |
$ 110,000 |
|
Interest Semi-Annually @ 6% |
$ 3,300 |
(Face Value of Bonds * Coupon rate ) / 2 |
Semi-Annual Effective interest Rate r = ( 4%) |
0.0400 |
8.0% |
Time Period (n) 5 years |
10.00 |
5 |
Present Value of Face Value of Bond |
$ 74,312 |
Face Value/(1+r%)^2n |
Present Value of Interest payment |
$ 26,766 |
Interest * ((1-(1+r)^-n)/r) |
Issue Price Of Bond |
$ 101,078 |
PV of Face value of bond + PV of Interest Paid Annually |
Premium or (Discount) |
$ (8,922) |
Issue Price - Face Value of Bonds |
C: The issue price if the bonds are priced to yield @ 4%, $ 119,881
semi-Annually |
Formula Applied |
|
Face Value of Bond |
$ 110,000 |
|
Interest Semi-Annually @ 6% |
$ 3,300 |
(Face Value of Bonds * Coupon rate ) / 2 |
Semi-Annual Effective interest Rate r = ( 4%) |
0.0200 |
4.0% |
Time Period (n) 5 years |
10.00 |
5 |
Present Value of Face Value of Bond |
$ 90,238 |
Face Value/(1+r%)^2n |
Present Value of Interest payment |
$ 29,643 |
Interest * ((1-(1+r)^-n)/r) |
Issue Price Of Bond |
$ 119,881 |
PV of Face value of bond + PV of Interest Paid Annually |
Premium or (Discount) |
$ 9,881 |
Issue Price - Face Value of Bonds |
End of answer.
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