Computing Bond Issue Price Need answers to blank spots. Thanks! QUESTION 1 Parti
ID: 2408189 • Letter: C
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Computing Bond Issue Price
Need answers to blank spots. Thanks!
QUESTION 1 Partially correct Mark 0.33 out of 1.00 Flag question Computing Bond Issue Price Bushman, Inc., issues $400,000 of 9% bonds that pay interest semiannually and mature in 10 years. Compute the bond issue price assuming that the bonds' market rate is: a. 6% per year compounded semiannually. (Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.) Present value of principal repayment $ Present value of interest payments $ 267,794 Selling price of bonds b. 8% per year compounded semiannually. (Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.) Present value of principal repayment $ Present value of interest payments $ 244,626 Selling price of bonds CheckExplanation / Answer
CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $4,00,000 Annual Coupon % 9.00% Annual Coupon Amount $36,000 Semi Annual Coupon Amount $18,000 Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 6% Bonds interest is paid semi annualy means so discounting factor = 6 % /2= 3 % PVF = 1 / Discount rate = 1/ 1.03 Result of above will again divide by 1.03 , repeat this lat period Period Interest Amount (In Million) PVF @ 3% PresentValue 1 Interest $18,000.00 0.9709 $17,475.73 2 Interest $18,000.00 0.9426 $16,966.73 3 Interest $18,000.00 0.9151 $16,472.55 4 Interest $18,000.00 0.8885 $15,992.77 5 Interest $18,000.00 0.8626 $15,526.96 6 Interest $18,000.00 0.8375 $15,074.72 7 Interest $18,000.00 0.8131 $14,635.65 8 Interest $18,000.00 0.7894 $14,209.37 9 Interest $18,000.00 0.7664 $13,795.50 10 Interest $18,000.00 0.7441 $13,393.69 11 Interest $18,000.00 0.7224 $13,003.58 12 Interest $18,000.00 0.7014 $12,624.84 13 Interest $18,000.00 0.6810 $12,257.12 14 Interest $18,000.00 0.6611 $11,900.12 15 Interest $18,000.00 0.6419 $11,553.52 16 Interest $18,000.00 0.6232 $11,217.00 17 Interest $18,000.00 0.6050 $10,890.30 18 Interest $18,000.00 0.5874 $10,573.10 19 Interest $18,000.00 0.5703 $10,265.15 20 Interest $18,000.00 0.5537 $9,966.16 21 Bond Principal Value $4,00,000.00 0.5537 $2,21,470.30 Total $4,89,264.85 Current Bonds Price = $4,89,264.85 Present Value of the Principal = $2,21,470 Present Value of the interest Paymemts = $2,67,794 Selling Price of the Bonds $4,89,264 CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $4,00,000 Annual Coupon % 9.00% Annual Coupon Amount $36,000 Semi Annual Coupon Amount $18,000 Step 2: Calculate number of years to Maturity Number of years to maturity = 10 years Interest is paid semi annyally so total period = 10 Years * 2 = 20 Periods Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds Market rate of interest or Yield to Maturity or Required Return = 8% Bonds interest is paid semi annualy means so discounting factor = 8 % /2= 4 % PVF = 1 / Discount rate = 1/ 1.04 Result of above will again divide by 1.04 , repeat this lat period Period Interest Amount (In Million) PVF @ 4 % PresentValue 1 Interest $18,000.00 0.9615 $17,307.69 2 Interest $18,000.00 0.9246 $16,642.01 3 Interest $18,000.00 0.8890 $16,001.93 4 Interest $18,000.00 0.8548 $15,386.48 5 Interest $18,000.00 0.8219 $14,794.69 6 Interest $18,000.00 0.7903 $14,225.66 7 Interest $18,000.00 0.7599 $13,678.52 8 Interest $18,000.00 0.7307 $13,152.42 9 Interest $18,000.00 0.7026 $12,646.56 10 Interest $18,000.00 0.6756 $12,160.16 11 Interest $18,000.00 0.6496 $11,692.46 12 Interest $18,000.00 0.6246 $11,242.75 13 Interest $18,000.00 0.6006 $10,810.33 14 Interest $18,000.00 0.5775 $10,394.55 15 Interest $18,000.00 0.5553 $9,994.76 16 Interest $18,000.00 0.5339 $9,610.35 17 Interest $18,000.00 0.5134 $9,240.72 18 Interest $18,000.00 0.4936 $8,885.31 19 Interest $18,000.00 0.4746 $8,543.56 20 Interest $18,000.00 0.4564 $8,214.97 21 Bond Principal Value $4,00,000.00 0.4564 $1,82,554.78 Total $4,27,180.65 Current Bonds Price = $4,27,180.65 Present Value of the Principal = $1,82,555 Present Value of the interest Paymemts = $2,44,626 Selling Price of the Bonds $4,27,181
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