The market price of an $980000, ten-year, 8% (pays interest semiannually) bond issue sold to yield...

The market price of an $980000, ten-year, 8% (pays interest semiannually) bond issue sold to yield an effective rate of 6% is

$1874325.

$1134459.

$1124068.

$1125803.

Solutions

Expert Solution

--Correct Answer = Option #4: $ 1,125,803

	Amount	PV factor	Present Values
PV of Face Value of	$ 980,000.00	0.55368	$ 542,606.40
PV of Interest payments of	$ 39,200.00	14.87747	$ 583,196.82
Issue Price of Bonds			$ 1,125,803 Answer

--Concept

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

--Data

Face Value	$ 980,000.00
Term (in years)	10
Total no. of interest payments	20

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	6.0%	3.0%
Coupon Rate	8.0%	4.0%

ekkarill92 answered 7 months ago

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