Question

Assume that Acropolis Company on January 1, 2014, issues $100,000 of 9% bonds, due in five ars, with interest payable semiannually on every Jun 30 and Dec 31. What are the selling prices this bond, if the market interest rates are the following? (You may use the "Handout: Present lue Tables" for calculation) 9% $ 10% 8% For (b), were the bonds issued at a premium or discount?

Answer 1

Price of the Bond is Present value of Future cash inflows form bond discounted at market interest rates. Future cashinflows is = Coupon Payments and Maturity Proceeds Semi Annual Coupon Payment is = Face value * Coupon Rate * 0.5 Semi Annual Coupon Payment is = (10000049%+0.5) Semi Annual Coupon Payment is = $ 4,500 /. Maturity Proceeds is = 5 100,000 /. No of Semi Annuals is = 10 Market interest rates are given for annual which are to be converted into semi annual for each case Computation of Present Value = Price of the bonds:- Present PVF Semi Cash PVE Present Value $ @5.00% Value $ Annual flows $ (i) @4.50% (ii) PVE @4.00% (iv) 4,500 1.0000 4,500 0.9569 4,500 0.9157 4,500 0.8763 4,500 0.8386 4,500 0.8025 4,500 0.7679 4,500 0.7348 4,500 0.7032 4,500 0.6729 100,000 0.6729 Price of the bond 4,500 4,306 4,121 3,943 3,774 3,611 3,456 3,307 3,164 3,028 67,290 104,500 1.0000 0.9524 0.9070 0.8638 0.8227 0.7835 0.7462 0.7107 0.6768 0.6446 0.6446 4,500 4,286 4,082 3,887 3,702 3,526 3,358 3,198 3,046 2,901 64,461 100,946 1.0000 0.9615 0.9246 0.8890 0.8548 0.8219 0.7903 0.7599 0.7307 0.7026 0.7026 Present Value $ (i*iv) 4,500 4,327 4,161 4,000 3,847 3,699 3,556 3,420 3,288 3,162 70,259 108,218 Price of the bond at 9% is S 104,500, at 10% is S 100,946 and at 8% is S 108,218/. b) At all market interets rates, Bond is trading at above the par value, which is called as trading at premium.