Kingbird Corporation issues $590,000 of 9% bonds, due in 10 years, with interest payable semiannually. At...

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Kingbird Corporation issues $590,000 of 9% bonds, due in 10 years, with interest payable semiannually. At...

Kingbird Corporation issues $590,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

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Answer 1

Answer #1

Issue price of Bond= $ 5,53,236.48 or $ 5,53,236

Bond will be issued at discount since market rate of interest is higher than coupon rate

Working

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

	Annual Rate	Applicable rate	Face Value	$ 5,90,000.00
Market Rate	10.00%	5.00%	Term (in years)	10
Coupon Rate	9.00%	4.50%	Total no. of interest payments	20

Calculation of Issue price of Bond
	Bond Face Value		Market Interest rate (applicable for period/term)
PV of	$ 5,90,000	at	5.00%	Interest rate for	20	term payments
PV of $1	0.3768895
PV of	$ 5,90,000	=	$ 5,90,000	x	0.37689	=	$ 2,22,364.79	A

Interest payable per term	at	5%	on	$ 5,90,000
Interest payable per term	$ 26,550

PVAF of 1$	for	5.0%	Interest rate for	20	term payments
PVAF of 1$	12.46221
PV of Interest payments	=	$ 26,550.00	x	12.46221	=		$ 3,30,871.68	B

				Bond Value (A+B)			$ 5,53,236.48

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Answer 2

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