Question

The Chestnut Street Company plans to issue $825,000, 10-year bonds that pay 7 percent semiannually on March 31st and September 30th. 3 5 5 7 Information relating to this bond is found below: Face Value: $ 825,000 Number of Years: 10 Stated Interest Rate: 7% 3 Number of Payments per Year: 21 20 Required: 1 Calculate or provide the information requested using a formula or cell reference unless 2 you are instructed to use a specific function: 3 4 1) Assume the Market Interest Rate is: 8% 5 6 a. How many total payments or periods will this bond pay interest? 7 8 b. When calculating the bond selling price, show the factor from 9 the appropriate future or present value table (found in worksheets 0 included in this workbook) that would be used to calculate the 1 bond interest payments. 2 3 c. Repeat question b. but now use the VLOOKUP function. 4 For the Lookup_value argument, your function should reference 5 the result you calculated in question a. Your function should look for 6 an exact match to the value used in the Lookup_value argument. 7 8 d. Calculate the amount of interest that will be paid on March 31st. $ 13.59033 28,875

Answer 1

Ans-1-(c )

Table not available. but can be determined by formula

[1-(1+i/2)^-2n)]/i/2 = 13.59033

where -

i = 8% and n = 10

Ans-1-(e)

Present Value of Interest payments outflows of 28875 (7%*825000/2) over the bond period will be considered for calculating the bond selling price.Discounting will be taking Market rate of 8%

Ans-1-(f)

Bond selling price = PV of Interest Payments + PV of Bond Liability = PMT*[1-(1+i/2)^-2n)]/(i/2) + C / (1+i)^n = 774555

i = 8% , PMT = 28875 , C = 825000

Ans-1-(g)

PV of Interest and Bond Liability= D11	774555
Face Value of Bond= D12	825000
Premium/Discount	=IF((D11>D12),"PREMIUM","DISCOUNT")

It is a case of DISCOUNT

Ans-2-(a)

Factor for calcultaing the PV of cash flows on Interest Payments (discount rate 6%) will be

14.87747

Calculated as -

[1-(1+i/2)^-2n)]/i/2

Where i = 6% and n = 10

Ans 2 -(b)

Table not available

Ans-2-(c )

Interest payable at 31st March = 825000*7%*0.5 = 28875

(basis the stated rate)

Ans-2-(d)

Present Value of Interest payments outflows of 28875 (7%*825000/2) over the bond period will be considered for calculating the bond selling price.Discounting will be taking Market rate of 6%.

Ans-2-(e)

Bond selling price = PV of Interest Payments + PV of Bond Liability = PMT*[1-(1+i/2)^-2n)]/(i/2) + C / (1+i)^n = 890263

i = 6% , PMT = 28875 , C = 825000

Ans-2-(f)

PV of Interest and Bond Liability=D11	890262
Face Value of Bond=D12	825000
Premium/Discount	=IF((D11>D12),"PREMIUM","DISCOUNT")

Here it is PREMIUM