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Brief Exercise 14-1 Pina Corporation issues $460,000 of 9% bonds, due in 11 years, with interest...

Brief Exercise 14-1

Pina Corporation issues $460,000 of 9% bonds, due in 11 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

Compute the issue price of the bonds. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)

Issue price of the bonds???

Expert Solution

Price of the bond could be calculated using below formula.

P = C/ 2 [1 - {(1 + YTM/2) ^2*n}/ (YTM/2)] + [F/ (1 + YTM/2) ^2*n]

Where,

Face value (F) = $460000

Coupon rate = 9%

YTM or Required rate = 10%

Time to maturity (n) = 11 years

Annual coupon C = $41400

Let's put all the values in the formula to find the bond current value

P = 41400/ 2 [{1 - (1 + 0.1/2) ^-2*11}/ (0.1/ 2)] + [460000/ (1 + 0.1/2) ^2*11]

= 20700 [{1 - (1 + 0.05) ^ -22}/ (0.05)] + [460000/ (1 + 0.05) ^22]

= 20700 [{1 - (1.05) ^ -22}/ (0.05)] + [460000/ (1.05) ^22]

= 20700 [{1 - 0.34185}/ (0.05)] + [460000/ 2.92526]

= 20700 [0.65815/ 0.05] + [157250.9794]

= 20700 [13.163] + [157250.9794]

= 272474.1 + 157250.9794

= 429725.0794

So price of the bond is $429725.08

ekkarill92 answered 1 year ago

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