Question

Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $50,000. If the effective annual rate of interest is 11%, what is the issue price of the bonds? Some relevant and irrelevant present value factors: * PV of ordinary annuity of $1: n = 20; i = 11% is 7.96333 **PV of $1: n = 20; i = 11% is 0.12403 * PV of ordinary annuity of $1: n = 40; i = 5.5% is 16.04612 **PV of $1: n = 40; i = 5.5% is 0.11746 Multiple Choice $1,000,000. $919,766. $1,802,306. $992,948.

Answer 1

Answer: $919,766

Step-by-step explanation:

The Present Value of issuance price of a bond is:

= Present value of interest payments + Present Value of par value at maturity

Present value of interest payments:

The payments are constant so this is an annuity.

Payments are semi annual so the variables should be adjusted for this.

Interest = 11%/2 = 5.5%

Number of periods = 20 * 2 = 40 semi annual periods.

Present value = Annuity * Present value of annuity factor, 5.5%, 40 periods

= 50,000 * 16.04612

= $802,306

Present value of par at maturity:

= Par value * discount factor, 5.5%, 40 years

= 1,000,000 * 0.11746

= $117,460

Issue price of bond:

= 802,306 + 117,460

= $919,766