On January 1, 2018, Water Wonderland issues $20 million of 7% bonds, due in seve
ID: 2535917 • Letter: O
Question
On January 1, 2018, Water Wonderland issues $20 million of 7% bonds, due in seven years, with interest payable semiannually on June 30 and December 31 each year. Use Table 2 and Table 4.
1. If the market rate is 6%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount. Enter your answer in dollars, not in millions.)
2. If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount. Enter your answer in dollars, not in millions.)
3. If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price. (Round "PV Factor" to 5 decimal places. Round other intermediate calculations and final answer to the nearest dollar amount. Enter your answer in dollars, not in millions.)
Explanation / Answer
1. Present value of bond= $20000000/(1+0.03)^14 + 20000000*3.5%(1-(1+0.03)^-14/0.03
=20000000/(1.03)^14 + 700000(1-(1.03)^-14) /0.03
=13222353.71 + 700000(1-1/1.512590)/0.03
=13222353.71 +7907254
=21129607.71
Bond is issued at premium
2. Present value of bond =20000000/(1+0.035)^14 + 700000(1-(1+0.035)^-14 )/0.035
=20000000/(1.035)^14 + 700000 (1-1/(1.035)^14 )/0.035
=12355632.16 +7644367.84
=20000000
Bond is issued at face amount
3. Present value of bond =20000000/(1+0.04)^14 +700000 *(1-(1+0.04)^-14 )/0.04
=20000000/(1.04)^14 + 700000 (1-1/(1.04)^14 /0.04
=20000000 /1.731676 +7394183.44
=11549504. 64 + 7394183. 44
=18943688.08
Bond is issued at discount
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