Question

VSE Air Destinations issues bonds due in 12 years with a stated interest rate of 11% and a face value of $400,000. Interest payments are made semi- annually. The market rate for this type of bond is 12%. Using present value tables, calculate the issue price of the bonds. (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Price of bond = C x [1-(1+r)^-n/r] + F/(1+r) ⁿ

F = Face value = $ 400,000

C = Coupon rate = Face value x Coupon rate/Annual coupon frequency

                            = $ 400,000 x 0.11/2

                            = $ 400,000 x 0.055 = $ 22,000

n = Numbers of period to maturity = 12 years x 2 = 24 periods

r = Interest rate = 12 % p.a. or 12%/2 = 6 % semi-annually

Substituting the values on above formula, we get:

Price of bond = C x [1-(1+r)^-n/r] + F/(1+r) ⁿ

  = $ 22,000 x PVIFA (6 %, 24) + $ 400,000 x PVIF (6 %, 24)

= $ 22,000 x 12.550 + $ 400,000 x 0.2470

= $ 98,800 + $ 276,100

= $ 374,900

Issue price of the bond is $ 374,900

Option “$ 374,900” is correct answer.