Question

On October 1, 2020. Eastern Timber Inc. has available for issue $850,000 bonds due in four years. Interest at the rate of 5.00% is to be paid quarterly. Calculate the issue price if the market interest rate is: (Do not round Intermediate calculations. Round the final answers to the nearest whole dollar.) Issue Price a. 6% b. 5%

Answer 1

on ist october-2020 Eastern Timber Inc has available for issue $850,000 due in 4 years (that is maturity period = 4 years) Interest rate=5% per annum, interest paid Quakeily 2. Quarterly Interest rate = 54x 3 months - 12 months = 1. 25% for each year years, there are '4 quarters. and there by in the span of 4 years there are 16 questen periods" - 4yearsx u quarter periods - (16 periods (a) 18sue price of the Bond is market interest rate is 6r. p.a. Quarterly interest rate = 64x512 = (1.5% Issue price of the Bond Interest & PUIFA(1.5%, 16 periods) + Amount facevalued & PULF (1.5%, 16th period) Bond Interest Ant = ($8,50,000 x 1.25%) *$ = $101625 ni Issue price of Bond 2 $10,625 x(14:1313) +($850,000 x 0.7880) = $150,105-0625 +669,800 =$819,9457

pared to When the market Interest rate is higher than the coupan sate 6e, St.), M161 Cunentvalen Cement Then the value of the Bond decreases as compared to the issueprice. issue price of Bond. (b) issue price of the bond of market Interest rate is. 567 Quaterly interest - 5%x3/12 = 1.2506) Bond Issue price of the = ($850,000 xl-259.) XpUlf A (1.251., 16 periods) + $850,000.xpulf (1.254.,16th period) — = ($10,625x14:4203) +($850,000 X 0.81975) - $1480 24+ = $153,215 +$696785 - J$ 850,000 (1.25 (1.251) when the market interest rate is higher than the equal to the coupan rate of the Bond", The Cument value of the Bond which es cqual to the issue price of the Bond (c) issue price of the Bond if market interest rate is 4% p.az Qua texty therest rate = 4%x | -14% Issue price of the Bond. = ($850,000 X 1-25-6.) x PULFA (27., 16 periods) + $850,000 xC pulf 17., Toth period)

issue price of the - Bond 10.625* 14-7179)+($850,000 X 0.85282) = $ 101625X479+(4 osoon =$156,378 +$724,897 = $881,275) When the market interest rate (i.e., 1%) which is lower than the coupan rate of the Bond (ie, 1-254), Then the issue price of the Bond which is more than the current Face value of the Bond, If you have any doubt, please clarify through a comment, and please do upward voting for the Answer thank you