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Issue Price Youngblood Enterprises plans to issue $250,000 face value bonds with a stated interest rate...

Issue Price

Youngblood Enterprises plans to issue $250,000 face value bonds with a stated interest rate of 8%. They will mature in 5 years. Interest will be paid semiannually. At the date of issuance, assume that the market rate is (a) 8%, (b) 6%, and (c) 10%.

Use the appropriate present value table:

PV of $1 and PV of Annuity of $1

Required:

For each market interest rate, answer the following questions. Round calculations and answers to the nearest whole dollar. Due to differences in rounding when using the present value factors, you need to round your answer for the ISSUE PRICE in the first column only to the nearest 100.

Market Rate
8% 6% 10%
1. What is the amount due at maturity? $ $ $
2. How much cash interest will be paid every six months? $ $ $
3. At what price will the bond be issued? $ $ $
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Answer #1

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a.) A bond issued at par It is reasonable that a bond promising to pay only 8% interest will sell at par when the market is also expecting to earn 8% interest. Discount Present value of bond to be issued Bond Rate Market rate Face Value or Maturity Value Market Value Life Discount 8% Annual 8% Annual 4.00% 4.00% 250,000 250,000 5 Annual 10 0 The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest Interest Payment-Coupon Rate FV Annuity Factor (1-(1+r)A-N)r r-Market Rate 10,000 8.1109 4% 10 The Present Value of Interest 81,109 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+r)AN 250,000 0.675564 Present Value 168,891 Present Value of Bond 250,000 250,000 Round off

b.) A bond issued at premium It is reasonable that a bond promising to pay 8% interest will sell for more than its face value when the market is expecting to earn only 6% interest. Bond Rate/Coupon Rate Market rate Face Value or Maturity Value Market Value Life Premium 8%; semiannual 6% semiannual 4.00% 3.00% 250,000 271,300 5Seinual 10 21,300 Computation of Present value of bond to be issued The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest pon Rate FV Interest Payment-Cou Annuity Factor=( 1-(1H)AN)/r r-Market Rate 10,000 8.53 3% 10 The Present Value of Interest 85,300 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+r)AN 250,000 0.744 Present Value of bond maturity Value 186,000 Present Value of Bond 271,300

c.) A bond issued at a discount It is reasonable that a bond promising to pay only 8% interest will sell for discount when the market is expecting to earn 10% interest Discount Present value of bond to be issued Bond Rate Market rate Face Value or Maturity Value Market Value Life Discount 8%Annual 10% Annual 4.00% 5.00% 250,000 230,700 5 Annual 10 19,300 The PV of the Bond-PV of Interests+PV of Bond Maturity Value PV of Interest Interest Payment-Coupon Rate FV Annuity Factors( 1-(1+rn-N)/r r-Market Rate 10,000 7.722 5% 10 The Present Value of Interest 77,220 PV of Bond Maturity Value-Face Value PV factor for N Face Value or Maturity Value PV factor-1/(1+r)AN 250,000 0.614 Present Value 153,500 Present Value of Bond 230,720 230,700 Round offMarket Rate 8% 6% 10% 1. What is the amount due at maturity? 2. How much cash interest will be paid every six months? 3. At what price will the bond be issued? 250,000 250,000 250,000 10,000 10,000 10,000 250,000 271,300 230,700

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