On January 1, 20X1, WP Industries issued $200,000 (face value) of bonds with a stated (coupon)...

On January 1, 20X1, WP Industries issued $200,000 (face value) of bonds with a stated (coupon) rate of 6%. The bonds pay interest semi-annually on June 30 and December 31 and mature in 15 years. If the market rate of interest on the issue date was 8%, the bonds will sell for

Select one:

a. $200,000

b. $171,420

c. $239,201

d. $165,416

e. $165,762

Solutions

Expert Solution

Semi annual interest payment = Par value of bonds x Stated interest rate x 6/12

= 200,000 x 6% x 6/12

= $6,000

Market interest rate = 8%

Semi annual Market interest rate = 4%

Maturity period of bonds = 15 years or 30 semi annual periods

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 200,000 x Present value factor (4%, 30)

= 200,000 x 0.30832

= $61,664

Present value of interest to be paid periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 6,000 x Present value annuity factor (4%, 30)

= 6,000 x 17.29203

= $103,752

Selling price of bond = Present value of principal to be paid at the maturity + Present value of interest to be paid periodically over the term of the bonds

= 61,664+103,752
= $165,416

The bonds will sell for = $165,416

Correct option is d.

Kindly give a positive rating if you are satisfied with this solution and please ask if you have any query.

Thanks

ekkarill92 answered 1 year ago

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