Question

Trew Company plans to issue bonds with a face value of $906,500 and a coupon rate of 6 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answers to nearest whole dollar amount.) Determine the issuance price of the bonds assuming an annual market rate of interest of 8.0 percent. Issuance price

Answer 1

When the market interest rate is higher as compared to coupon rate on bonds, the bond will be selling at a discount to its face value.

And when the market interest rate is lesser as compared to coupon rate on bonds, the bond will be selling at a premium to its face value.

When both rates are same, the bond will be selling at its face value.

Trew Company
Bond Face Value	906500
Coupon Rate	6%
Semi Annual Interest Payments (A)	27195
Bond Maturity (Years)	10
Annual Market Rate	8%
PVIFA @ 4% for 20 semi annual Years (B)	13.59033
Present Value of Interest Payments (C)	3,69,589
PV @ 4% for 20 semi annual Years	0.4564
PV of Bond Maturity Value (D)	4,13,727
Issue Price of Bond = (C) + (D)	7,83,316

Williams Company:

In this case annual coupon rate and market interest rate is same i.e 8%. Thus selling/issue price of the bond will be $607,500.

Williams Company
Bond Face Value	607500
Coupon Rate	8%
Semi Annual Interest Payments (A)	24300
Bond Maturity (Years)	10
Annual Market Rate	8%
PVIFA @ 4% for 20 semi annual Years (B)	13.59033
Present Value of Interest Payments (C)	3,30,245
PV @ 4% for 20 semi annual Years	0.4564
PV of Bond Maturity Value (D)	2,77,263
Issue Price of Bond = (C) + (D)	6,07,508

Note: Due to rounding off of PV & PVIFA, the exact value of $607,500 is not coming.