Question

A company issues 8%, 5 year bonds with a par value of $500,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 6%. What is the bond's issue (selling) price, assuming the Present Value of $1 factor for 3% and 10 semi-annual periods is .7441 and the Present Value of an Annuity factor for the same rate and period is 8.5302

Answer 1

$542,654

Step-by-step explanation:

Interest payment (Semi-annual) = 500,000 * 8% * 6/12 = $20,000

PV of principal to be received at the maturity = Par value of bonds * PV factor (r%, n) = 500,000 * PV factor (3%, 10) = 500,000 * 0.7441 = $372,050

PV of interest to be received periodically over the term of the bonds = Interest * PV annuity factor (r%, n) = 20,000 * PV annuity factor (3%, 10) = 20,000 * 8.5302 = $170,604

Issue price of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bond = $372,050 + $170,604 = $542,654