Question

M7-19. Computing Bond Issue Price Abbington Inc. issues $700,000 of 9% bonds that pay interest semiannually and mature in 10 years. Com- pute the bond issu a. 8% per year compounded semiannually. b. 10% per year compounded semiannually.

Answer 1

a

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (4%,20 periods)	31,500.0	13.5903	428,095.28
	Principle payments -Present value (4%,20 periods)	700,000	0.4564	319,470.86
A	Bond price			747,566.14
	Face value			700,000.00
	Premium/(Discount)			47,566.14
	Interest amount:
	Face value	700,000
	Coupon/stated Rate of interest	9.00%
	Frequency of payment(once in)	6 months
B	Interest amount	700000*0.09*6/12=		31500
	Present value calculation:
	yield to maturity/Effective rate	8.00%
	Effective interest per period(i)	0.08*6/12=		4.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	10.0
c=a*b	Number of periods	20

b

	Particulars	Cash flow	Discount factor	Discounted cash flow
	Interest payments-Annuity (5%,20 periods)	31,500.0	12.4622	392,559.63
	Principle payments -Present value (5%,20 periods)	700,000	0.3769	263,822.64
A	Bond price			656,382.26
	Face value			700,000.00
	Premium/(Discount)			-43,617.74
	Interest amount:
	Face value	700,000
	Coupon/stated Rate of interest	9.00%
	Frequency of payment(once in)	6 months
B	Interest amount	700000*0.09*6/12=		31500
	Present value calculation:
	yield to maturity/Effective rate	10.00%
	Effective interest per period(i)	0.1*6/12=		5.000%
	Number of periods:
Ref	Particulars	Amount
a	Number of interest payments in a year	2
b	Years to maturiy	10.0
c=a*b	Number of periods	20