Issue Price The following terms relate to independent bond issues: 560 bonds; $1

Question

Issue Price

The following terms relate to independent bond issues:

560 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments

560 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments

850 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments

2,190 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments

Required:

Assuming the market rate of interest is 10%, calculate the selling price for each bond issue. Refer to the tables above for present value factors. If required, do not round intermediate calculations and round all final answers to the nearest dollar.

Situation Selling Price of the Bond Issue

a. $

b. $

c. $

d. $

Explanation / Answer

A.

calculate the PVs of the coupon payments by

PV of coupon first year = 80/(1+0.1)^1 = 72.73

PV of coupon second year = 80/(1+0.1)^2 = 66.12

PV of coupon third year = 80/(1+0.1)^3 = 60.11

PV of 4th year = 80/(1+0.1)^4 = 54.64

PV of 5th year = 1080/(1+0.1)^5 = 670.60

Selling price of the bond = sum of all the PVs = 924.18

Bond issue price = 924.18*560 = 517540.8

B.

Similar to the previous question, calculate the present value of all the future cashflows.

Here, no. of payments = 10 (Semi Annual)

Coupon = 40 (0.08*1000/2)

Selling price = 38.10+36.28+34.55+32.91+31.34+29.85+28.43+27.07+25.78+638.47

Selling Price = 922.78

Bond issue price = 922.78*560 = 516.756.8

C.

Here, no. of payments = 20 (Semi Annual)

Coupon = 40 (0.08*1000/2)

Selling price = 875.38

Bond issue price = 875.38*850 = 744073

D.

Here, no. of payments = 30 (Semi Annual)

Coupon = 60 (0.12*1000/2)

Face Value = 500

Selling price = 749.63

Bond issue price = 749.63*2190 = 1641699.3

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