Question

Ajax Company issued a $10,000,000 dollar bond on Oct 1, 2019, with a coupon rate of 8.84% and a market rate of 7.44%. The bonds have a 30-year maturity and interest on the bonds are paid semi-annually on April 1 and Oct 1. Answer the following questions regarding this bond:

What is the face value of this bond?

How many bonds are being issued?

What is the is issue price of these bonds?

What is the semi-annual amount of interest on these bonds?

What is the maturity date of these bonds?

Are these bonds selling at par value; a discount or premium? Explain?

What is the current yield on this bond?

Define Yield-to Maturity How much accrued interest must the company report as of December 31, 2019?

What is the YTM on this bond?

True or False When the coupon rate is less than the market rate the bonds will sell at a premium. Explain!

What would Ajax want to do if the interest rates begin to increase? Explain

Explain why a company would want to issue bonds and not stock.

Answer 1

1-	face value of bond		1000
2-	number of bonds issued	10000000/1000	10000
3-	Issue price of bond = (coupon payment*PVAF at 3.72% for 60 semi annual period)+(face value*PVF at 3.72% at 60th semiannual period)	(44.2*23.87741)+(1000*.11175)	1167.13
	PVAF at 3.72% for 60 semiannual period =1-(1+r)^-n / r	1-(1.0372)^-60/3.72%	.88824/3.72%	23.8774194
	pvf at 3.72% at 60th semiannual period	1/(1+r)^n	1/1.0372^60	0.11175051
4-	amount of semiannual interest on bond	face value*coupon rate*1/2	1000*8.84%*1/2	44.2
5-	maturity date on bonds	sep 30 2049
6-	selling at premium because coupon rate is greater than market interest rate
7-	current yield on bonds = coupon payment/price of bonds	88.4/1167.13	7.57%
8-	Yield to maturity refers to rate of return which bonds will earn from the date of purchase till the final year of maturity. It is the return which bondholder will earn over the life of bond.
	Accrued interest on Dec 31 2019	10000000*8.84%*3/12	221000
9-	YTM on bond=Using rate function in MS excel	YTM on bond is equal to market interest rate which is 7.44%
10-	false because bonds would be issued at a price lower than the face value and it is called discount bonds
11-	issuance of bond over stock we advantage as (1) tax advantage as interest on bonds is considered a tax deductable expense for business (2) there is no dilution of control