Question

Item8 1 points Time Remaining 24 minutes 26 seconds00:24:26 Item 8Item 8 1 points Time Remaining 24 minutes 26 seconds00:24:26 Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)

Answer 1

The issue price of the bond is $186,409.67

Step-by-step explanation:

Price of the bond is the present value of all cash flows of the bond. These cash flows include the coupon payment and the maturity payment of the bond.

According to given data

Face value of the bond is $200,000

Coupon payment = C = $200,000 x 7% = $14,000 annually = $7,000 semiannually

Number of periods = n = 10 years x 2 = 20 period

Market rate = r = 8% / 2 = 4% semiannually

Price of the bond is calculated by following formula:

Price of the Bond = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ $1,000 / ( 1 + r )^n ]

Price of the Bond = $7,000 x [ ( 1 - ( 1 + 4% )^-20 ) / 4% ] + [ $200,000 / ( 1 + 4% )^20 ]

Price of the Bond = $95,132.28 + $91,277.39 = $186,409.67