Question

: On 1/1/X1, Wolfpack Inc. issues 3-year bonds with a face value of $50,000 and a face (stated) rate of 4% compounded semi-annually. The market interest rate for bonds of similar risk and maturity is 5% compounded semi-annually. Interest is paid semi-annually on June 30 and December 31 beginning on June 30, 20X1. The bonds mature on 12/31/X3. A. What is the issue price of the bonds on 1/1/X1? Note to student: If you have trouble answering this question, go to the last page of this graded assignment where you will be asked a series of questions that, if answered correctly, should lead you to the correct answer. Answer: $__

Answer 1

The issue price of the bond on 1/1/X1 is: $48,623.

Step-by-step explanation:

We discounted the cash flow from the bond, comprising of the coupon stream and the principal repayment, at market return rate applied to other bond with similar risk and maturity to come up with the issue price of the bond.

We have: r = 5/2 = 2.5%; Semi-annual payment = 50,000 x 4%/2 = 1,000; n = 3 x 2 = 6

Thus Issue price = Present value of coupon stream + Present value of principal repayment = (1,000 / 2.5%) x [ 1 - (1+2.5%)^-6 ] + (50,000/1.025^-6) = $48,623.