A company issues 8%, 5 year bonds with a par value of $500,000 and semiannual interest...
A company issues 8%, 5 year bonds with a par value of $500,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%.
What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302?
Homework Answers
Semi annual interest payment = 500,000 x 8% x 6/12
= $20,000
Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)
= 500,000 x Present value factor (3%, 10)
= 500,000 x 0.7441
= $372,050
Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)
= 20,000 x Present value annuity factor (3%, 10)
= 20,000 x 8.5302
= $170,604
Issue price of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds
= 372,050+170,604
= $542,654
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