Question

Sand Explorers issues bonds due in 12 years with a stated interest rate of 9% and a face value of $280,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. Using present value tables, calculate the issue price of the bonds. (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

• $206,146.

• $301,346.

• $351,129.

• $280,000.

Answer 1

Answer

• Correct Answer = Option #2: $ 301,346
• Concept

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

• Data

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	8.0%	4.0%
Coupon Rate	9.0%	4.5%

Face Value	$             280,000.00
Term (in years)	12
Total no. of interest payments	24

• Answer calculation

	Amount	PV factor	Present Values
PV of Face Value of	$                       280,000.00	0.39012	$                     109,233.60
PV of Interest payments of	$                          12,600.00	15.24700	$                     192,112.20
Issue Price of Bonds			$                     301,345.80 or $ 301,346