Question

Chapter 10 6 Saved Help Save & Exit Submit Check my work Waterhouse Company plans to issue bonds with a face value of $502,500 and a coupon rate of 6 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to nearest whole dollar.) points Determine the issuance price of the bonds assuming an annual market rate of interest of 4 percent. Skipped Issuance price eBook Print References

Answer 1

Issuance price of bond is the present value of future cash flows.
Present value of coupon		$       2,46,498
Present value of par value		$       3,38,168
Present value of cash flow		$       5,84,666
So, issuance price is		$       5,84,666
Working:
Coupon Payment	=	Par Value	*	Semi annual coupon rate
	=	$       5,02,500	*	3%
	=	$           15,075
Present value of annuity of 1	=	(1-(1+i)^-n)/i		Where,
	=	(1-(1+0.02)^-20)/0.02		i	=	2%
	=	16.35143334		n	=	20
Present value of 1	=	(1+i)^-n
	=	(1+0.02)^-20
	=	0.672971333
Present value of coupon	=	Coupon Payment	*	Present value of annuity of 1
	=	$           15,075	*	16.35143
	=	$       2,46,498
Present value of par value	=	Par Value	*	Present value of 1
	=	$       5,02,500	*	0.672971
	=	$       3,38,168