Question

23- 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. (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

• $238,948.

• $425,100.

• $400,000.

• $374,900.

Answer 1

Answer

• Correct Answer = Option #4: $ 374,900
• Concept:

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at 'applicable' market rate of interest [Face value x PV Factor], and

Discounted Interest payments amount (during the lifetime) at 'applicable' market rate of interest [Interest payment x PV Annuity factor]

• Data

	Annual Rate	Applicable rate, because of Semi Annual payments
Market Rate	12.0%	6.0%
Coupon Rate	11.0%	5.5%

Face Value	$             400,000.00
Term (in years)	12
Total no. of interest payments	24

• Calculation for Answer

	Amount	PV factor	Present Values
PV of Face Value of	$                       400,000.00	0.24700	$                       98,800.00
PV of Interest payments of	$                          22,000.00	12.55000	$                     276,100.00
Issue Price of Bonds			$                     374,900.00