Question

Kinsey Corporation issues $100,000 of 8% bonds, due in 25 years, when the market rate of interest is 9%. Interest is paid semi annually on June 30 and December 31. The issue price of the bonds is:

a. $90,119
b. $90,177
c. $92,586
d. $100,000

Answer 1

Option a.

Step-by-step explanation:

Given information:

Face value of bond = $100,000

Interest rate of bonds = 8%

Interest is paid semi annually, So the value of interest is

`Interest=100000* (8)/(1000)* (6)/(12)=4000`

Market interest rate = 9%

Time = 25 years

Present value of annuity factor
`=(1-(1+r)^(-n))/(r)`

`=(1-(1+0.045)^(-50))/(0.045)`

`=19.7620089`

Present value factor
`=(1)/((1+r)^(n))`

`=(1)/((1+0.045)^(50))`

`0.11070965`

Value of bond = (Present value of annuity factor × interest payment) + (present value factor × face value)

Value of the bond
`=(19.7620089* 4000)+(0.11070965* 100,000)`

`\approx 90,119`

The issue price of the bonds is $90,119.

Therefore, the correct option is a.