Question

excel Carie Company issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. Using a financial calculator or Excel, what is the issue price of the bonds

Answer 1

$ 538,972.91

Step-by-step explanation:

The value of the bond is the present value (PV) of the future cash receipts expected from the bond. The value is equal to present values of interest payment plus the redemption value (RV) discounted at the yield rate

Value of Bond = PV of interest + PV of RV

The value of bond for Carie Company can be worked out as follows:

Step 1

PV of interest payments

PV = A × (1+r)^(-n)/r

A-semi annul interest payment:

= 6% × 500,000× 1/2 = 15,000

r-Semi annul yield = 5%/2 = 2.5%

n-Maturity period = 10× 2 = 20

PV of interest payment:

=15,000× (1- (1+0.025)^(-20)/0.025)

= 233,837.43

Step 2

PV of Redemption Value

= 500,000× (1.025)^(-20)

=305,135.4714

Step 3

Price of bond

= 233,837.43 + 305,135.4714

=$ 538,972.91