Question

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Required information The following information applies to the questions displayed below) On January 1, 2021. Frontier World issues $39.3 million of 7% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. 3-a. If the market rate is 8%, calculate the issue price. (EV of $1. PV of $1. FVA of $1, and PVA of $1 (Use appropriate factor(s) from the tables provided. Do not round interest rate factors. Enter your answers in dollars not in millions. Round Market interest rate" to 1 decimal place. Round your final answers to the nearest whole dollar.) Amount 39,300,000 Bond Characteristics Face amount Interest payment Periods to maturity Market interest rate Issue price 3-b. The bonds will issue at A Discount A Premium Face amount

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$3,93,00,000
	Annual Coupon %			7.00%
	Annual Coupon Amount			$27,51,000
	Semi Annual Coupon Amount			$13,75,500
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 10 years
	Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 8%
	Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 %
	PVF = 1 / Discount rate = 1/ 1.04
	Result of above will again divide by 1.04 , repeat this lat period
	Period	Interest	Amount (In Million)	PVF @ 4%	PresentValue
	1	Interest	$13,75,500	0.9615	$13,22,596
	2	Interest	$13,75,500	0.9246	$12,71,727
	3	Interest	$13,75,500	0.8890	$12,22,814
	4	Interest	$13,75,500	0.8548	$11,75,783
	5	Interest	$13,75,500	0.8219	$11,30,561
	6	Interest	$13,75,500	0.7903	$10,87,078
	7	Interest	$13,75,500	0.7599	$10,45,267
	8	Interest	$13,75,500	0.7307	$10,05,064
	9	Interest	$13,75,500	0.7026	$9,66,408
	10	Interest	$13,75,500	0.6756	$9,29,239
	11	Interest	$13,75,500	0.6496	$8,93,499
	12	Interest	$13,75,500	0.6246	$8,59,133
	13	Interest	$13,75,500	0.6006	$8,26,090
	14	Interest	$13,75,500	0.5775	$7,94,317
	15	Interest	$13,75,500	0.5553	$7,63,766
	16	Interest	$13,75,500	0.5339	$7,34,391
	17	Interest	$13,75,500	0.5134	$7,06,145
	18	Interest	$13,75,500	0.4936	$6,78,985
	19	Interest	$13,75,500	0.4746	$6,52,871
	20	Interest	$13,75,500	0.4564	$6,27,760
	20	Bond Principal Value	$3,93,00,000	0.4564	$1,79,36,007
		Total			$3,66,29,501
		Current Bonds Price =			$3,66,29,501
	ANSWER = 1 (A)
		Bond Characteristics	Amount
		Face Amount	$3,93,00,000
		Interest Payment	$2,75,10,000
		Period to Maturity	20 Period
		Market interest Rate	8%
		Issue Price	$3,66,29,501
	ANSWER = 1 (B)
		Bonds will be issued at discount because market rate of interest is lower than bonds coupon rate
		Answer = Option A = Discount