On January 1, 2012, Water World issues $26 million of 8% bonds, due in 9 years,

Question

On January 1, 2012, Water World issues $26 million of 8% bonds, due in 9 years, with interest payable semiannually on June 30 and December 31 each year. Water World intends to use the funds to build the world's largest water avalanche and the "tornado"—a giant outdoor vortex in which riders spin in progressively smaller and faster circles until they drop through a small tunnel at the bottom.


if the market rate is 6%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.



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If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.





If the market rate is 10%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.

Explanation / Answer

We have FV = $26M, As two Int payments every year, it is a semiannual coupon. Period = 9 yrs = 9*2 semianual period pa = 18 periods. Coupon 8%, So HY PMT = 8%*26M/2 = 1.04M if the market rate is Rate= 6%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. Issue Price = PV is given by PV(Rate,nper,PMT,FV) = PV(6%/2,18,1040000,26000000) = $29,575,913 .............Ans If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. Issue Price = PV is given by PV(Rate,nper,PMT,FV) = PV(8%/2,18,1040000,26000000) =$26M .............Ans If the market rate is 10%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. Issue Price = PV is given by PV(Rate,nper,PMT,FV) = PV(10%/2,18,1040000,26000000) =$22,960,707............Ans

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