Question 11 The following information pertains to Camp Corp.\'s issuance of bond

Question

Question 11 The following information pertains to Camp Corp.'s issuance of bonds on July 1, 2017: Face amount Term Stated interest rate Interest payment dates Yield $800,000 10 years 6% Annually on July 1 9% Present value of 1 for 10 periods Future value of 1 for 10 periods Present value of ordinary annuity of 1 for 10 periods At 6% 0.558 1.791 7.360 At 9% 0.422 2.367 6.418 What should be the issue price for each $1,000 bond? O $864 O $807 $700 O $1,000 Click if you would like to Show Work for this question:

Explanation / Answer

Correct answer is : $ 807

Explanation:

Issue price of the bond is present value of the bond in terms of the amount that will be received during the bond holding period. Two type of income is received : one is interest income that will be received on the face value of the bond annually and the sum that will be received at the maturity.

In the given question Interest @ 6% will be received for the period of 10 years on the face value of $ 1000. So, interest amount is $ 60. Now to get the present value we have to multiply it by the present value of ordinary annunity 1for 10 periods for the yield rate i.e. 60*6.418= $ 385

Present value of face value at the end of maturity= $ 1000 * .422

=$ 422

Total issue price of bond = $ 385+422

=$ 807

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