Question

On 2 January 2016, Platinum Berhad issued 5 % bonds dated 1 January 2016, with a principal amount of RM100,000,000. The bonds will mature in 2035. On the issuance date, for bonds of similar risk and maturity, the market yield is 4%. Interest is paid semiannually on 30 June and 31 December. Compute the issuance price of the bond on 2 January 2016. Show all computations

Answer 1

Issue Price of the Bond

The Issue Price of the Bond is the Present Value of the Coupon Payments plus the Present Value of the face Value

Face Value of the bond = RM100,000,000

Semi-annual Coupon Amount = RM2,500,000 [RM100,000,000 x 5% x ½]

Semi-annual Yield to Maturity of the Bond = 2.00% [4.00% x ½]

Maturity Period = 38 Years [(Jan 2016 to Jan 2035) x 2]

Therefore, the Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the face Value

= RM2,500,000[PVIFA 2.00%, 39 Years] + RM100,000,000[PVIF 2.00%, 38 Years]

= [RM2,500,000 x 26.44064060] + [RM100,00,000 x 0.47118719]

= RM66,101,602 + RM47,118,719

= RM113,220,320

“Hence, the Issue Price of the Bond will be RM113,220,320”

NOTE

-The formula for calculating the Present Value Annuity Inflow Factor (PVIFA) is [{1 - (1 / (1 + r)ⁿ} / r], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.  

-The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)ⁿ], where “r” is the Yield to Maturity of the Bond and “n” is the number of maturity periods of the Bond.