Question

Required Information Exercise 9-18A Calculate the issue price of bonds (LO9-7) The following information applies to the questions displayed below] On January 1, 2021, Frontier World issues $39.7 million of 9% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. Exercise 9-18A Part 1 Required: 1-a. If the market rate is 8%, calculate the issue price. (FV of $1. PV of $1. FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round Interest rate foctors. Enter your answers in dollars not in millions. Round "Market interest rate" to 1 decimal place. Round your final answers to the nearest whole dollar.) Bond Characteristics Amount Face amount 30.700,000 $ Interest payment Periods to maturity Market interest rate 40 4.0% issue price Next

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$3,97,00,000
	Annual Coupon %			9.00%
	Annual Coupon Amount			$35,73,000
	Semi Annual Coupon Amount			$17,86,500
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 20 years
	Interest is paid semi annyally so total period = 20 Years * 2 = 40 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 8%
	Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 %
	Market rate of interest or Yield to Maturity or Required Return = 9%
	Bonds interest is paid semi annualy means so discounting factor = 9 % /2= 4.5 %
	Period	Interest	PVF @ 4%	PVF @ 4.5%
	1	Interest	0.9615	0.9569
	2	Interest	0.9246	0.9157
	3	Interest	0.8890	0.8763
	4	Interest	0.8548	0.8386
	5	Interest	0.8219	0.8025
	6	Interest	0.7903	0.7679
	7	Interest	0.7599	0.7348
	8	Interest	0.7307	0.7032
	9	Interest	0.7026	0.6729
	10	Interest	0.6756	0.6439
	11	Interest	0.6496	0.6162
	12	Interest	0.6246	0.5897
	13	Interest	0.6006	0.5643
	14	Interest	0.5775	0.5400
	15	Interest	0.5553	0.5167
	16	Interest	0.5339	0.4945
	17	Interest	0.5134	0.4732
	18	Interest	0.4936	0.4528
	19	Interest	0.4746	0.4333
	20	Interest	0.4564	0.4146
	21	Interest	0.4388	0.3968
	22	Interest	0.4220	0.3797
	23	Interest	0.4057	0.3634
	24	Interest	0.3901	0.3477
	25	Interest	0.3751	0.3327
	26	Interest	0.3607	0.3184
	27	Interest	0.3468	0.3047
	28	Interest	0.3335	0.2916
	29	Interest	0.3207	0.2790
	30	Interest	0.3083	0.2670
	31	Interest	0.2965	0.2555
	32	Interest	0.2851	0.2445
	33	Interest	0.2741	0.2340
	34	Interest	0.2636	0.2239
	35	Interest	0.2534	0.2143
	36	Interest	0.2437	0.2050
	37	Interest	0.2343	0.1962
	38	Interest	0.2253	0.1878
	39	Interest	0.2166	0.1797
	40	Interest	0.2083	0.1719
	SOLUTION 1 (A)
			Cumulative value of $ 1 @ 4% in 20 Years and 4 0 Periods	AMOUNT
	Face Amount			39700000
	Interest Payment	$17,86,500	19.7928	3,53,59,791
	Period to Maturity			40.00
	Market Interest Rate			4%
	Issue Price
	Interest Payment	$17,86,500	19.7928	3,53,59,791
	Add: Par Value	$3,97,00,000	0.2083	82,69,075
	Issue Price =			4,36,28,866
	SOLUTION 1 (B)
			Cumulative value of $ 1 @ 4.5% in 20 Years and 40 Periods	AMOUNT
	Face Amount			$3,97,00,000
	Interest Payment	$17,86,500	18.4016	3,28,74,431
	Period to Maturity			40.00
	Market Interest Rate			4%
	Issue Price
	Interest Payment	$17,86,500	18.4016	3,28,74,431
	Add: Par Value	$3,97,00,000	0.1719	68,25,569
	Issue Price =			3,97,00,000