Question

The following information pertains to Fox Corp.'s issuance of bonds on July 1, 20x8:

Face amount $800,000
Term 10 years
Stated interest rate 9%
Interest payment dates Annually on July 1
Yield 6%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of ordinary annuity
of 1 for 10 periods 7.360 6.418
What should be the issue price for this bond?
a. $700.
b. $807.
c. $864.
d. $1,000.

Answer 1

It will be issued at $807

Step-by-step explanation:

The bonds will be issued at the sum of the present value of the coupon payment and maturity discounted at the market stated rate of 9%

Coupon Payment:

`C * (1-(1+r)^(-time) )/(rate) = PV\\`

Coupon payment face valiue x coupon rate:

$1,000 x 6% = $60

time 10 years

market stated rate 0.09

`60 * (1-(1+0.09)^(-10) )/(0.09) = PV\\`

PV $385.0595

Maturity present value:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity $1,000.00

time 10 years

market rate 0.09

`(1000)/((1 + 0.09)^(10) ) = PV`

PV 422.41

We add both values and achieve the market value of the bonds

PV coupon $ 385.0595

PV maturity $ 422.4108

Total $ 807.4703

Rounding we got the right answer as $ 807