Question

Complete the below table to calculate the price of a $1.2 million bond issue under each of the following independent assumptions (FV of $1, PV of $1. FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.): 1. Maturity 14 years, interest paid annually, stated rate 8%, effective (market) rate 10% 2. Maturity 10 years, interest paid semiannually, stated rate 8%, effective (market) rate 10% 3. Maturity 5 years, interest paid semiannually, stated rate 10%, effective (market) rate 8% 4. Maturity 10 years, interest paid semiannually, stated rate 10 %, effective (market) rate 8% 5. Maturity 10 years, interest paid semiannually, stated rate 10%, effective (market) rate 10% Complete this question by entering your answers in the tabs below. Required 2 Required 5 Required 1 Required 3 Required 4 Maturity 14 years, interest paid annually, stated rate 8%, effective (market) rate 10%. Round your answers to the nearest whole dollar.) Table values are based on: 14 n = 8.0% Cash Flow Amount Present Value Interest Principal Price of bonds Required 2 Required 1

Answer 1

Answer:

Formulas:

Price or Present Value of Bonds= Present Value of Interests + Present Value of Maturity Amount

Price or Present Value of Bonds= (Interest Amount * Present value annuity factor till maturity) + (Maturity Amount* Present Value Factor of maturity year)

1) For annual payments, interest rate will be = 8%

Period will be =14 annual periods & discount rate will be= 10%

Price or Present Value of Bonds= (1,200,000,000* 0.08*7.366) +( 1,200,000,000*0.340)

                                                        = 707,136,000 + 315,600,000 = $1,022,736,000

2) For semi- annual payments, interest rate will become half i.e. 8/2= 4%

Period will become double i.e. 10*2=20 semi- annual periods & discount rate will be= 10%

Price or Present Value of Bonds= (1,200,000,000* 0.04*8.513) + (1,200,000,000*0.149)

                                                        = $587,424,000

3) For semi- annual payments, interest rate will become half i.e. 10/2= 5%

Period will become double i.e. 5*2=10 semi- annual periods & discount rate will be= 8%

Price or Present Value of Bonds= (1,200,000,000*0.05*6.710) + (1,200,000,000*0.463)

                                                        = $958,200,000

4) For semi- annual payments, interest rate will become half i.e. 10/2= 5%

Period will become double i.e. 10*2=20 semi- annual periods & discount rate will be= 8%

Price or Present Value of Bonds= (1,200,000,000*0.05*9.817) + (1,200,000,000*0.215)

                                                        = $847,020,000

5) For semi- annual payments, interest rate will become half i.e. 10/2= 5%

Period will become double i.e. 10*2=20 semi- annual periods & discount rate will be= 10%

Price or Present Value of Bonds= (1,200,000,000*0.05*8.513) + (1,200,000,000*0.149)

                                                        = $689,580,000