Question

Issue Price of a Bond Abbott, Inc., plans to issue $500,000 of ten percent bonds that will pay interest semiannually and mature in five years. Assume that the effective interest rate is 12 percent per year compounded semiannually. Calculate the selling price of the bonds. Round answers to the nearest whole number. Selling price of bonds is $

Answer 1

Answer:- The selling price of bond is = $463203.

Explanation-Calculation of selling price of bond at issuance=

                B₀ =C/2 {1-(1+r/2)^-2t}/ r/2 +F/(1+r/2)^-2t

Where:-

Bo = Bond price

C= Coupon payment

r = Interest Rate

F= Face value

t = Years/Periods

Since the interest is paid semi-annually the bond interest rate per period is 5% (= 10%/ 2), the market interest rate is 6% (= 12%/ 2) and number of time periods are 10 (= 2*5). Hence, the price of the bond is calculated as the present value of all future cash flows as shown below:-

Price of Bond =5%*$500000*{1-(1+6%)^-10/6%} +$500000/(1+6%)¹⁰

                         =($25000*7.3601)+ ($500000*0.5584)

                         = $184003+$279200

                         =$463203