Question

Olay Inc. issues $40,000, 8%, 10-year bonds payable on January 1, 2020. Calculate the selling price of the bonds under the following separate assumptions. as solved on a financial calculator

a. The bonds pay cash interest annually ($3,200) and the market rate of interest on similar bonds is 10%.  

b. The bonds pay cash interest annually ($3,200) and the market rate of interest on similar bonds is 8%.  

c. The bonds pay cash interest annually ($3,200) and the market rate of interest on similar bonds is 6%.  

d. The bonds pay cash interest semiannually ($1,600) and the market rate of interest on similar bonds is 10%.  

e. The bonds pay cash interest semiannually ($1,600) and the market rate of interest on similar bonds is 8%.  

f. The bonds pay cash interest semiannually ($1,600) and the market rate of interest on similar bonds is 6%.  

Answer 1

Solution: Formula for selling price (issue price) of bonds = coupon[1-(1+i)^-n ] / I + FV/(1+i)ⁿ

a. Selling price of bonds = $3,200[ 1- (1+0.10)^-10 ] / 0.10 + $40,000 / (1+0.10)¹⁰

   = $35,084.35

b. Selling price of bonds = $3,200 [ 1 -(1+0.08)^-10 ] / 0.08 + 40,000 / (1+0.08)¹⁰

= $40,000 (Here, selling price is equal to face value because coupon rate is equivalent to market rate of interest)

c. Selling price of bonds = $3,200 [ 1 - (1+0.06)^-10 ] / 0.06 + 40,000 / (1+0.06)¹⁰

   = $45,888.07

d. Selling price of bonds = $1,600 [1 - (1 + 0.10/2)^-10*2 ] / (0.10/2) + 40,000 / (1+0.10/2)^10*2

= $35,015.12

e. Selling price of bonds = $1,600 [1 - (1 + 0.08/2)^-10*2 ] / (0.08/2) + 40,000 / (1+0.08/2)^10*2

= $40,000

f. Selling price of bonds = $1,600 [1 - (1 + 0.06/2)^-10*2 ] / (0.06/2) + 40,000 / (1+0.06/2)^10*2

   = $45,950.99

I rounded off all the answer to the two decimal places. U can round off the answers as per your instructor's requirement.