Question

On October 1, 2023, Dejour Energy Inc. issued a $682,000, 8.0%, seven-year bond. Interest is to be paid annually each October 1. Dejour Energy Inc. has a November 30 year-end. (Use TABLE 14A.1 and TABLE 14A.2.). Note: Use table values for PV calculations. (Use appropriate factor(s) from the tables provided.) Calculate the issue price of the bond assuming a market interest rate of 10.0% on the date of the bond issue.

Answer 1

The issue price of the bond is $576,034.35.

Step-by-step explanation:

To calculate the issue price of the bond, we use the present value of annuities formula, considering the annual interest payments of $54,560 (8% of $682,000).

Using Table 14A.1, we find the present value interest factor for seven years at a 10% market interest rate, which is 5.65. Multiplying the annual interest payment by this factor gives us the present value of the annuity: $54,560 * 5.65 = $307,744. Add the present value of the face amount of the bond, which is the present value factor for seven years at 10%, resulting in $268,290.35. Therefore, the issue price of the bond is the sum of these two amounts: $307,744 + $268,290.35 = $576,034.35.

This calculation reflects the relationship between the market interest rate and the bond's annual interest payments. When the market interest rate is higher than the bond's coupon rate, the bond is issued at a discount, as is the case here. The discount compensates investors for the lower coupon payments compared to the prevailing market rates. The issue price represents the present value of future cash flows discounted at the market interest rate.