Question

A company issued 8%, 10-year bonds with a face amount of $100 million. The market yield for bonds of similar risk and maturity is 6%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Enter your answers in whole dollars.)

Answer 1

The price at which the bonds sold is $717.88 million.

Step-by-step explanation:

To calculate the price at which the bonds sold, we can use the present value formula. The present value of a bond is the sum of the present values of its future cash flows, discounted at the market yield. In this case, the bond pays semiannual interest of 8% on a $100 million face amount, or $4 million per year.

With a 10-year maturity, there will be 20 interest payments. Using the present value annuity payment factor of 11.470, we can calculate the present value of the interest payments as $45.88 million.

The present value of the face amount, using the present value factor for a single payment of 6.72, is $672 million.

Therefore, the price at which the bonds sold is the sum of the present values of the interest payments and the face amount, which is $45.88 million + $672 million = $717.88 million.