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.

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 part (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b). If necessary, round all calculations to the nearest dollar.

Here are some time value of money factors:
Present value of an annuity, n=10, i=7%, PV=7.02358
Present value of an annuity, n=20, i=3%, PV=14.87747
Present value of a single amount, n=10, i=7%, PV=0.50835
Present value of a single amount, n=20, i=3%, PV=0.55368

Explanation / Answer

1a Bonds would be issued at par value, since coupon rate on bond is equal to market rate of interest. 1b The bonds will be issued at discount , since market rate is higher than coupon rate and to increase the yield upto market rate, decrease in price is expected. 2a 100000 x 0.55368* $          55,368 3000 x 14.87747** $          44,632 $        100,000 *Present value of a single amount, n=20, i=3%, PV=0.55368 **Present value of an annuity, n=20, i=3%, PV=14.87747 2b 100000 x 0.50835* $          50,835 6000 x 7.02358** $          42,141 $          92,976 *Present value of a single amount, n=10, i=7%, PV=0.50835 **Present value of an annuity, n=10, i=7%, PV=7.02358

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