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 a face value. 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. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%. 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

Solution.

2. a.

Present value of an annuity = $100,000 x 7% = $7,000 x 7.02358 = $49,165.06

Present value of a single payment = $100,000 x 0.50835 = $50,835

Bond price =$49,165.06 + $50,835 = $100,000

b.

Present value of an annuity = $100,000 x 7% / 2 = $3,500 x 14.87747 = $52,071.14

Present value of a single payment = $100,000 x 0.55368 = $55,368

Bond price = $52,071.14 + $55,368 = $107,439

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