Question

Seaside issues a bond that has a stated interest rate of 10%, face amount of $50,000, and is due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Multiple Choice

• $83,920.

• $46,320.

• $53,605.

• $50,000.

Answer 1

Correct answer---------$46,320

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 50,000
Market Rate	12.00%	6.00%		Term (in years)	5
Coupon Rate	10.00%	5.00%		Total no. of interest payments	10

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$               50,000	at	6.00%	Interest rate for	10	term payments
PV of $1	0.55839
PV of	$               50,000	=	$ 50,000	x	0.55839	=	$ 27,920	A
Interest payable per term	at	5.00%	on	$ 50,000
Interest payable per term	$ 2,500
PVAF of 1$	for	6.00%	Interest rate for	10	term payments
PVAF of 1$	7.36009
PV of Interest payments	=	$ 2,500	x	7.36009	=		$ 18,400	B
				Bond Value (A+B)			$                       46,320