To calculate the issuance price of the Williams Company's bonds with a face value of $606,000 and a coupon rate of 8%, the present value of the semiannual interest payments and the principal must be considered. Since the market rate is also 8%, the issuance price will equal the face value. However, if market interest rates rise, the present value and hence the issuance price would be lower.
The question pertains to calculating the issuance price of bonds given a certain face value, coupon rate, and market rate of interest. We need to consider that the interest is paid semiannually. To calculate the issuance price of the Williams Company's bonds, we have to discount the future cash flows, which include the semiannual interest payments and the principal amount paid at maturity.
For an 8% annual coupon rate with semiannual payments, the company will pay 4% every six months. The face value of the bonds is $606,000, so each semiannual interest payment will be $606,000 × 4%, which equals $24,240. Since the market rate of interest is also 8%, the present value of these interest payments and the principal (paid at maturity) will equal the face value of the bond, hence no discount or premium is required. Therefore, the semiannual interest payments and the principal are already at their present values, resulting in an issuance price equal to the bond's face value of $606,000.
Considering a simple two-year bond example, with a face value of $3,000 and an 8% coupon rate, we would have annual interest payments of $240. If the market interest rates rise to 11%, the discount rate used to calculate this bond's present value would increase. This would decrease the bond's present value as the future cash flows would be discounted at a higher rate, thus lowering the issuance or current price of the bond.