Question

Required information The following information applies to the questions displayed below.) On January 1, 2021, Water World issues $25.6 million of 6% bonds, due in 20 years, with interest payable semiannually on June 30 and December 31 each year. Water World intends to use the funds to build the world's largest water avalanche and the "tornado' a giant outdoor vortex in which riders spin in progressively smaller and faster circles until they drop through a small tunnel at the bottom. Required: 1-a. If the market rate is 5%, calculate the issue price. (FV of $1. PV of $1. EVA of S1, and PVA of S1) (Use appropriate factor(s) from the tables provided. Do not round Interest rate factors. Round Market interest rate" to 1 decimal place. Enter your answers in dollars not in millions. Round your final answers to the nearest whole dollar) Bond Characteristics Face amount Amount 25,600,000 $ Interest payment Periods to maturity Market interest rate Issue price

Answer 1

Answer:

Bond characteristic Face amount Interest payment Periods to maturity Market interest rate Issue price Amount $ 25,600,000 $ 768,000 40 2.50% $ 28,813,155

Explanation:

Market interest rate = 5% Market interest rate for a semiannual period = 5% / 2 = 2.5% r=0.25 (per semiannual period), n = 40 (semiannual periods) Present value of principal = $25,600,000 x Present value factor for a single payment (2.5%, 40 periods) = $25,600,000 x 0.372430624 = $9,534,224 Interest payment each semiannual period = $25,600,000 x 3% = $768,000 (Coupon rate for a semiannual period = 6% / 2 = 3%.) Present value of interest payments = Interest payment each semiannual period x Present value factor for an ordinary annuity (2.5%, 40 periods) = ($25,600,000 x 3%) x 25.10277505 = $19,278,931 Price of bonds = Present value of principal + Present value of interest payments = $9,534,224 + $19,278,931 = $28,813,155 The bonds will be sold at a $3,213,155 premium from the face amount. ($28,813,155 - $25,,6000,000 = $3,213,155)