Stealth Fitness Center issues 9%, 10-year bonds with a face amount of $100,000. The market interest...
Stealth Fitness Center issues 9%, 10-year bonds with a face amount of $100,000. The market interest rate for bonds of similar risk and maturity is 8%. Interest is paid semiannually. At what price will the bonds be issued?
Homework Answers
When the coupon rate is greater than the market rate that means the bonds are issued at premium.
Issue price of bonds= Present value of principal+Present value of interest
= $45639+61156.485= $106795.485
Present value of principal= $100000*0.45639= $45639
Semiannual cash interest payment= $100000*9%*6/12= $4500
Present value of interest= $4500*13.59033= $61156.485
0.45639, is the Present value of $1, n= 20 years (10*2) and i= 4% (8%/2)
13.59033, is the Present value of ordinary annuity, n= 20 years (10*2) and i= 4% (8%/2)
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