Question

Chinook Inc. has available for issue a $3,220,000 bond due in eight years. Interest at the rate of 8.00% is to be paid semiannually. Calculate the issue price if the market interest rate is: (Do not round intermediate calculations. Round the final answers to the nearest whole dollar.)

	Market Interest Rate	Issue Price
a)	7.5
b)	8.00
c)	8.75

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Semi Annual Coupon Payments
	Par value of the bond issued is   =			$32,20,000
	Annual Coupon %			$0
	Annual Coupon Amount			$2,57,600
	Semi Annual Coupon Amount			$1,28,800
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 8 years
	Interest is paid semi annyally so total period = 8 Years * 2 = 16 Periods
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	When Market rate of interest or Yield to Maturity or Required Return = 7.5%
	Bonds interest is paid semi annualy means so discounting factor = 7.5 % /2= 3.75 %
	When Market rate of interest or Yield to Maturity or Required Return = 8%
	Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 %
	When Market rate of interest or Yield to Maturity or Required Return = 8.75%
	Bonds interest is paid semi annualy means so discounting factor = 8.75 % /2= 4.375 %
	Period (8 Yrs)	PVF of $ 1 @ 3.75 %	PVF of $ 1 @ 4 %	PVF of $ 1 @ 4.375 %
	1	0.963855	0.961538	0.958084
	2	0.929017	0.924556	0.917925
	3	0.895438	0.888996	0.879449
	4	0.863073	0.854804	0.842586
	5	0.831878	0.821927	0.807268
	6	0.801810	0.790315	0.773430
	7	0.772829	0.759918	0.741011
	8	0.744895	0.730690	0.709951
	9	0.717971	0.702587	0.680192
	10	0.692020	0.675564	0.651681
	11	0.667008	0.649581	0.624365
	12	0.642899	0.624597	0.598194
	13	0.619662	0.600574	0.573120
	14	0.597264	0.577475	0.549097
	15	0.575676	0.555265	0.526081
	16	0.554869	0.533908	0.504030
		11.870165	11.652296	11.336463
	Answer = A)
			Semi Annual Interest	Total of PVF of $ 1 @ 3.75%	Total
	Present Value of Semi annual interest =		$1,28,800	11.870165	$15,28,877.26
	Par Value of the Bonds                               =		$32,20,000	0.533908	$17,19,184.33
	Present value of Bond				$32,48,061.58
	Answer = B)
			Semi Annual Interest	Total of PVF of $ 1 @ 4 %	Total
	Present Value of Semi annual interest =		$1,28,800	11.652296	$15,00,815.67
	Par Value of the Bonds                               =		$32,20,000	0.533908	$17,19,184.33
	Present value of Bond				$32,20,000.00
	Answer = C)
			Semi Annual Interest	Total of PVF of $ 1 @ 4.375 %	Total
	Present Value of Semi annual interest =		$1,28,800	11.336463	$14,60,136.37
	Par Value of the Bonds                               =		$32,20,000	0.504030	$16,22,975.84
	Present value of Bond				$30,83,112.22