eBook Present Value Issue Prlce The following terms relate to independent bond i
ID: 2543964 • Letter: E
Question
eBook Present Value Issue Prlce The following terms relate to independent bond issues a. 510 bonds; $1,000 face value; 8% stated rate; 5 years, annual interest payments b. 510 bonds; $1,000 face value; 8% stated rate; 5 years, semiannual interest payments c. 840 bonds; 1,000 face value; 8% stated rate; 10 years, semiannual interest payments d. 1,990 bonds; $500 face value; 12% stated rate; 15 years, semiannual interest payments Required: Assuming the market rate o interest is 0%, ca cu ate the selling price or eac bond issue Re er to etables at ove or present va ue actors. I required do not round intermediate calculations and round all final answers to the nearest dollar. a. $471334 $470619 735317 $1147956 b. C. d. Hide Feedback Incorrect 1) Face value of the bonds is the maturity amount of the bonds as indicated on the face of the bond contract. 2) Face rate of interest is the amount of interest that be paid on the bonds as indicated in the bond contract. 3) n-perlods, Iannual market rate of Interest/periods per year. Bonds typically pay Interest twlce a year.Explanation / Answer
Case A Calculation of Issue price of Bond Issue Price of Bond = Present Value of Bond Repayment + Present Value of Future Interest Payments Present Value of Bond Repayment = Bond Value * P.V. Factor at the market Interest Rate for due period = (510*1000) * P.V factor of 10% for 5 years = 510000 * 0.621 = $ 316,710 Present Value of Interest Payment = Interest Amount * Present Value of annuity of market rate for due period = (510000*8%) * P. V. of anuity of 10% for 5 years = 40800 * 3.791 = $ 154,673 Hence, issue price of Bond = 316710 + 154673 = $ 471,383 Case B Issue Price of Bond = Present Value of Bond Repayment + Present Value of Future Interest Payments Present Value of Bond Repayment = Bond Value * P.V. Factor at the market Interest Rate for due period = (510*1000) * P.V factor of 10% for 5 years = 510000 * 0.621 = $ 316,710 Since the market rate is 10% and the interest is paid semiannually, we will use 5% to calculate the present value. Present Value of Interest Payment = Interest Amount * Present Value of annuity of market rate for due period = (510000*8%) * P. V. of anuity of 5% for 10 years = 40800 * 7.722 = $ 315,058 Hence, issue price of Bond = 316710 + 315058 = $ 631,768 Case C Issue Price of Bond = Present Value of Bond Repayment + Present Value of Future Interest Payments Present Value of Bond Repayment = Bond Value * P.V. Factor at the market Interest Rate for due period = (840*1000) * P.V factor of 10% for 10 years = 840000 * 0.386 = $ 324,240 Since the market rate is 10% and the interest is paid semiannually, we will use 5% to calculate the present value. Present Value of Interest Payment = Interest Amount * Present Value of annuity of market rate for due period = (840000*8%) * P. V. of anuity of 5% for 20 years = 67200 * 12.462 = $ 837,446 Hence, issue price of Bond = 324240 + 837446 = $ 1,161,686 Case D Issue Price of Bond = Present Value of Bond Repayment + Present Value of Future Interest Payments Present Value of Bond Repayment = Bond Value * P.V. Factor at the market Interest Rate for due period = (1990*500) * P.V factor of 10% for 15 years = 995000 * 0.239 = $ 237,805 Since the market rate is 10% and the interest is paid semiannually, we will use 5% to calculate the present value. Present Value of Interest Payment = Interest Amount * Present Value of annuity of market rate for due period = (995000*12%) * P. V. of anuity of 5% for 30 years = 119400 * 15.3725 = $ 1,835,477 Hence, issue price of Bond = 237805 + 1835477 = $ 2,073,282
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