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Maggie Enterprises issued $110,000 of 6%, 5-year bonds with interest payable semiannually. Determine the issue price...

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.  

Solutions

Expert Solution

Correct Answer:

A: Issue price of bond @ 6% market yield, $ 110,000

Working:

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: Issue price of bond @ 8% market yield, $ 101,078.

Working:

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 = ( 8%)

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: Issue price of bond @ 4% market yield, $ 119,881.

Working:

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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ekkarill92 answered 1 year ago
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