On March 1, 2014 Messier Inc. issued $2,000,000 of 4% term corporate bonds, due

Question

On March 1, 2014 Messier Inc. issued $2,000,000 of 4% term corporate bonds, due on March 1, 2024, with interest payable each March 1 and September 1. At the time the bonds were issued the market interest rate on similar bonds was 6% compounded semi-annually. The 4% and 6% interest rates in this problem are annual interest rates. (Show all calculations)

(a) What is the interest payment on the bonds that Messier Inc. will pay every March 1 and September 1 starting September 1, 2014?

(b) What is the present value of the future semiannual (twice per year) interest payments on the bonds as of March 1, 2014?

(c) On March 1, 2024 Messier will need to pay the final interest payment on the bonds and will need to pay the maturity payment. What is the maturity payment Messier will need to pay? Show only the maturity payment. Do not show the maturity payment plus the final interest payment.

(d) What is the present value of the maturity payment (the payment in part c above) as of March 1, 2014?

(e) Calculate what the bonds will sell for on March 1, 2014

Explanation / Answer

a. Interest payments on March1, and Sep1 are= 2000000*4%*6/12= 40000

b. Total number of interest payments= 10years*2times a year= 20 payments

Interest rate for 6months for the purpose of discounting= 6%/2= 3%

Present value annuity factor @3% for 20 periods= 14.877

Present value of interest payments= 40000*14.877= 595080

c. Since redemption at par, maturity amount= 2000000

d. Present value of maturity payment= 2000000* PVF(6%,10years) = 1116000

e. Bonds will sell for= present value of interest payments+present value of principle payment= 595080+1116000 = 1711080

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