Question

Air Destinations issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 7%. 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

• $537,194.

• $464,471.

• $359,528.

• $500,000.

Answer 1

Issue price of bonds	=	$    4,64,471
Workings:
Cash flow	Period	Amount	P.V Factor @ 3.5%	Present Value
Maturity value	20	$    5,00,000	0.50257	$         2,51,285
Interest (annuity)	1 to 20	$       15,000	14.21240	$         2,13,186
Total proceeds				$         4,64,471
Working notes:-
Interest is payable semiannually i.e twice a year
Semiannual coupon rate	=	Coupon rate / 2
	=	6% / 2
	=	3%
Number of semiannual periods	=	Number of years X 2
	=	10 years X 2
	=	20 years
Interest payment	=	$500000 X 3%
	=	$       15,000
Semiannual market interest rate	=	7% / 2
	=	3.5%