Homework Answers
Answer
- Concepts
|
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 |
13.0% |
6.5% |
|
Coupon Rate |
11.0% |
5.5% |
|
Face Value |
$ 50,000.00 |
|
Term (in years) |
5 |
|
Total no. of interest payments |
10 |
- Calculation
|
Amount |
PV factor |
Present Values |
|
|
PV of Face Value of |
$ 50,000.00 |
0.53273 [PV $1, 6.5%, 10th period] |
$ 26,636.50 |
|
PV of Interest payments of |
$ 2,750.00 |
7.18883 [PVA $1, 6.5%, 10th period] |
$ 19,769.28 |
|
Issue Price of Bonds |
$ 46,405.78 |
||
- Requirements
[1] Bonds Proceeds = $ 46,406
[2] Bonds are issued at DISCOUNT, because Issue price is LESS than Face Value.
[3] DISCOUNT = $ 50000 – 46406 = $ 3,594
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