Question

A company issued 12%, 20-year bonds with a face amount of $100 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Enter your answers in whole dollars.)

Answer 1

Answer -

Calculation of bonds sales price

	Particulars	Formula used	Explanation	Amount ($ in million)
I.	Present value of bonds interest payments	p [1 - (1+r)-n / r] p = Bonds semiannual interest payments = [($100*12%)*6/12] = $6. r = Adjusted discount rate of interest = (6% / 2) = 0.03 n = Number of period = (20years * 2) = 40 periods.	$6 [1 - (1+0.03)-40 / 0.03]	138.69
II.	Present value of face value of bond	FV / (1 + r)n FV = Face Value of bond = $100. r = Adjusted discount rate of interest = (6% / 2) = 0.03 n = Number of period = (20years * 2) = 40 periods.	$100 / (1+0.03)40	30.66
	Total		I + II	169.35

Hence, The bonds sales price = $169.35 million.