The Credit Corporation sells 900 bonds. Each bond has a par value of $1000. The

Question

The Credit Corporation sells 900 bonds. Each bond has a par value of $1000. The Bonds are sold on January 1, 2010. The interest rate listed on the bond is 8%. The bonds pay interest twice per year, June 30th and December 31st. The bonds are 15- year bonds.

The market interest rate (yield) for these types of bonds (securities) at the time the bonds are sold (January 1, 2010) is 6% annually.

Requirements:

a. What is the total amount of interest paid to the bondholders over the life of the bonds?

b. What is the present value of the interest payments over the life of the bonds?

c. What amount is paid to the bondholders to retire the bonds at the end of 15 years?

d. What is the present value of the face amount of the bonds on January 1, 2010?

e. What is the total amount the bonds sold for on January 1, 2010?

f. What is the present value of the bond issue if the market rate was 10% per year at date of issue?

g. Does the increase or decrease in interest rates in the market over the life of the bonds impact your calculations in "f" above? Why or Why not? (explain)

Explanation / Answer

a. Total amount of interest expense paid = [900 bonds * $1000 ]* 8% per annum * 15years

=900000 * 0.08 * 15

= $1080000

b Present value of interest payment = ($900000 *8%/2) * PVAF(3%,30year)

= ($900000 * 0.04)* 19.601

=36000 * 19.601

=705636

Note:-   market interest yield is 6% per annum, So half yearly yield is 3%

and time period will be = 15years * 2

= 30years

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