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 Future Value Factor for a Single Present Amount (Interest rate = r, Number of periods = n) nir COCO NOGAWIN- 1% 1.0100 1.0201 1.0303 1.0406 1.0510 1.0615 1.0721 1.0829 1.0937 1.1046 1.1157 1.1268 1.1381 1.1495 1.1610 1.1726 1.1843 1.1961 1.2081 1.2202 2% 3% 4% 5% 6% 7% 8% 9% 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.0404 1.06091.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3605 1.4116 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 1.5869 1.6771 1.1487 1.2299 1.3159 1.40711.5036 1.6058 1.71381.8280 1.1717 1.2668 1.3686 1.4775 1.5938 1.7182 1.8509 1.9926 1.1951 1.3048 1.4233 1.55131.6895 1.8385 1.9990 2.1719 1.21901.3439 1.4802 1.6289 1.7908 1.9672 2.1589 2.3674 1.2434 1.3842 1.5395 1.7103 1.8983 2.1049 2.3316 2.5804 1.2682 1.4258 1.6010 1.7959 2.0122 2.2522 2.5182 2.8127 1.2936 1.4685 1.6651 1.8856 2.13292.4098 2.7196 3.0658 1.3195 1.5126 1.7317 1.9799 2.26092.5785 2.9372 3.3417 1.34591.55801.8009 2.0789 2.3966 2.75903.1722 3.6425 1.3728 1.6047 1.8730 2.1829 3.4259 3.9703 1.4002 1.6528 1.94792.2920 2.6928 3.1588 3.7000 4.3276 1.4282 1.7024 2.0258 2.8543 3.3799 3.9960 4.7171 1.4568 1.7535 2.1068 2.5270 3.0256 3.6165 4.3157 5.1417 1.4859 1.8061 2.19112.6533 3.2071 3.8697 4.66105.6044 10% 11% 12% 13% 14% 15% 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.2100 1.2321 1.2544 1.27691.2996 1.3225 1.33101.3676 1.4049 1.4429 1.48151.5209 1.4641 1.51811.5735 1.63051.6890 1.7490 1.6105 1.6851 1.7623 1.84241.9254 2.0114 1.7716 1.8704 1.9738 2.0820 2.1950 2.3131 1.9487 2.0762 2.2107 2.35262.5023 2.6600 2.1436 2.3045 2.4760 2.6584 2.8526 3.0590 2.3579 2.5580 2.7731 3.0040 3.2519 3.5179 2.59372.8394 3.1058 3.3946 3.70724.0456 2.8531 3.1518 3.4785 3.8359 4.2262 4.6524 3.1384 3.4985 3.8960 4.3345 4.81795.3503 3.4523 3.8833 4.3635 4.8980 5.4924 6.1528 3.7975 4.3104 4.88715.5348 6.2613 7.0757 4.1772 4.7846 5.4736 6.2543 7.13798.1371 4.5950 5.31096.1304 7.0673 8.1372 9.3576 5.0545 5.89516.8660 7.9861 9.2765 10.7613 5.5599 6.5436 7.6900 9.0243 10.5752 12.3755 6.11597.2633 8.6128 10.1974 12.0557 14.2318 6.7275 8.0623 9.646311.5231 13.7435 16.3665 16% 17% 1.1600 1.1700 1.3456 1.3689 1.56091.6016 1.8106 1.8739 2.1003 2.1924 2.4364 2.5652 2.8262 3.0012 3.2784 3.5115 3.8030 4.1084 4.4114 4.8068 5.1173 5.6240 5.9360 6.5801 6.8858 7.6987 7.9875 9.0075 9.2655 10.5387 10.7480 12.3303 12.4677 14.4265 14.4625 16.8790 16.7765 19.7484 19.4608 23.1056 17 18

Answer 1

Issue price of bond = present value of principal value on bond + present value of interest on bond

= {$906,500 x PVF(4%, 20)} + {$27,195 x PVAF(4%, 20)}

= ($906,500 x 0.4564) + ($27,195 x 13.5903)

= $413,726.6 + $369,588.2085

= $783,315

therefore, the issue price of the bond is $783,315

where,

(1)

Coupon rate = 6%/2 = 3% semiannually

interest on bond = $906,500 x 3% = $27,195

(2)

Market interest rate = 8%/2 = 4% semiannually

Time period = 10 x 2 = 20

Therefore,

PVF(4%, 20) = 0.4564

PVAF(4%, 20) = 13.5903