LaTanya Corporation is planning to issue bonds with a face value of $106,000 and
ID: 2569740 • Letter: L
Question
LaTanya Corporation is planning to issue bonds with a face value of $106,000 and a coupon rate of 8 percent. The bonds mature in seven years. Interest is paid annually on December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)
Required:
Compute the issue (sale) price on January 1 of this year for each of the following independent cases:
a. Case A: Market interest rate (annual): 8 percent.
b. Case B: Market interest rate (annual): 6 percent.
c. Case C: Market interest rate (annual): 9 percent.
Explanation / Answer
ANSWER = CASE A: CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $1,06,000 Annual Coupon % 8.00% Annual Coupon Amount $8,480 Step 2: Calculate number of years to Maturity Number of years to maturity = 7 years Step 3 : Yield to Maturity = 8%, So discount rate = 8% PVF = 1 / Discount rate = 1/ 1.08 Result of above will again divide by 1.08 , repeat this till last period Years Interest Amount PVF @ 8% PresentValue 1 Interest $8,480.00 0.9259 $7,851.85 2 Interest $8,480.00 0.8573 $7,270.23 3 Interest $8,480.00 0.7938 $6,731.70 4 Interest $8,480.00 0.7350 $6,233.05 5 Interest $8,480.00 0.6806 $5,771.35 6 Interest $8,480.00 0.6302 $5,343.84 7 Interest $8,480.00 0.5835 $4,948.00 7 Bond Value $1,06,000.00 0.5835 $61,849.98 Total $1,06,000.00 Market Value of the Bond = $1,06,000.00 ANSWER = CASE B: MARKET INTEREST RATE = 6% CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $1,06,000 Annual Coupon % 8.00% Annual Coupon Amount $8,480 Step 2: Calculate number of years to Maturity Number of years to maturity = 7 years Step 3 : Yield to Maturity =6%, So discount rate = 6% PVF = 1 / Discount rate = 1/ 1.06 Result of above will again divide by 1.06 , repeat this till last period Years Interest Amount PVF @ 6% PresentValue 1 Interest $8,480.00 0.9434 $8,000.00 2 Interest $8,480.00 0.8900 $7,547.17 3 Interest $8,480.00 0.8396 $7,119.97 4 Interest $8,480.00 0.7921 $6,716.95 5 Interest $8,480.00 0.7473 $6,336.75 6 Interest $8,480.00 0.7050 $5,978.07 7 Interest $8,480.00 0.6651 $5,639.68 7 Bond Value $1,06,000.00 0.6651 $70,496.05 Total $1,17,834.65 Market Value of the Bond = $1,17,834.65 ANSWER = C = CASE C: MARKET INTEREST RATE = 9% CALCULATION OF CURRENT MARKET PRICE OF THE BOND OR PURCHASE PRICE Step 1 : Calculation of Annual Coupon Payments Par value of the bond issued is = $1,06,000 Annual Coupon % 8.00% Annual Coupon Amount $8,480 Step 2: Calculate number of years to Maturity Number of years to maturity = 7 years Step 3 : Yield to Maturity =9%, So discount rate = 9% PVF = 1 / Discount rate = 1/ 1.09 Result of above will again divide by 1.09, repeat this till last period Years Interest Amount PVF @ 9% PresentValue 1 Interest $8,480.00 0.9174 $7,779.82 2 Interest $8,480.00 0.8417 $7,137.45 3 Interest $8,480.00 0.7722 $6,548.12 4 Interest $8,480.00 0.7084 $6,007.45 5 Interest $8,480.00 0.6499 $5,511.42 6 Interest $8,480.00 0.5963 $5,056.35 7 Interest $8,480.00 0.5470 $4,638.85 7 Bond Value $1,06,000.00 0.5470 $57,985.63 Total $1,00,665.07 Value of the Bond = $1,00,665.07
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