Question

Stealth Fitness Center issues 5%, 6-year bonds with a face amount of $300,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually.

At what price will the bonds be issued? Use Table 2 and Table 4. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount.)

Answer 1

Issue price of Bond = $285,069

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

.

	Annual Rate	Applicable rate		Face Value	$ 300,000
Market Rate	6.00%	3.00%		Term (in years)	6
Coupon Rate	5.00%	2.50%		Total no. of interest payments	12

.

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$            300,000	at	3.00%	Interest rate for	12	term payments
PV of $1	0.70138
PV of	$            300,000	=	$ 300,000	x	0.70138	=	$ 210,414	A
Interest payable per term	at	2.50%	on	$ 300,000
Interest payable per term	$ 7,500
PVAF of 1$	for	3.00%	Interest rate for	12	term payments
PVAF of 1$	9.95400
PV of Interest payments	=	$ 7,500	x	9.95400	=		$ 74,655	B
				Bond Value (A+B)			$ 285,069