Question

Issue Price of a Bond Abbott, Inc., plans to issue $500,000 of ten percent bonds that will pay interest semiannually and mature in five years. Assume that the effective interest rate is 12 percent per year compounded semiannually. Calculate the selling price of the bonds. Round answers to the nearest whole number. Selling price of bonds is si

Answer 1

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]

• Workings

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	12.0%	6.0%
Coupon Rate	10.0%	5.0%

Face Value	$             500,000.00
Term (in years)	5
Total no. of interest payments	10

• Answer calculation

	Amount	PV factor	Present Values
PV of Face Value of	$             500,000.00	0.558394777 (PVF $1 at 6% for 10th period)	$          279,197.39
PV of Interest payments of	$               25,000.00	7.360087051 (PVA $1 at 6% for 10th period)	$          184,002.18
Issue Price of Bonds			$          463,199.56

• Correct Answer
  Selling Price of the Bond
  = $ 463,200