Factors That Affect the Bond Issue Price Becca Company is considering the issue

Question

Factors That Affect the Bond Issue Price
Becca Company is considering the issue of $100,000 face value, ten year term bonds. The bonds will pay 6% interest each December 31. The current market rate is 6%; therefore, the bonds will be issued at face value.
Required
1. For each of the following situations, indicate whether you believe the company will receive a premium on the bonds or will issue them at a discount or at face value. Without using numbers, explain your position.
a. Interest is paid semiannually instead of annually.
b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
2. For each situation in (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b).

Explanation / Answer

1. For each of the following situations, indicate whether you believe the company will receive a premium on the bonds or will issue them at a discount or at face value. Without using numbers, explain your position. a. Interest is paid semiannually instead of annually. No effect on Bond price. It will remain same b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%. As Current Mkt rate is more than coupon rate, Bond will be sold at a dicount to face value. 2. For each situation in (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b). We have Face Value FV=$100,000, Period = nper = 10, Coupon =6%, So PMT = 6%*100,000 = 6000 a. Interest is paid semiannually instead of annually. SO PMT=6000/2=3000, nper = 10*2=20, Rate = 6%/2 = 3% CUrrent Price = PV(Rate,nper,PMT,FV) = PV(3%,20,3000,100000) = $100,000 b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%. CUrrent Price = PV(Rate,nper,PMT,FV) = PV(7%,10,6000,100000) = $92,976

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