Question

Allure Company planned to raise $100,000 by issuing bonds. The bond certificates were printed bearing an interest rate of 8%, which was equal to the market rate of interest. However, before the bonds could be issued, economic conditions forced the market rate up to 9%. If the life of the bonds is 6 years and interest is paid annually on December 31, how much will Allure receive from the sale of the bonds

Answer 1

The issue Price will be less than $ 100000 because the 9 % market rate of interest was more than the stated (coupon) rate.

Step-by-step explanation:

Because the interest rate of market rate is above the coupon rate , so the buyers of the bond will be ready to pay less than the bond face value what this means is that, a discount would be issue by the bond.

Since the coupon rate is 8 % and the market interest rate is 9 % we conclude that issue price will be less than face value that is $ 100000.

Answer 2

Sale of the Bond Price = $95,514

Step-by-step explanation:

Data:

Coupon Rate = 8%

Face Value (F) = $100,000

Coupon (C) = 100,000 * 8% = $8,000

Market Rate (r) = 9%

No. of periods (n) = 6

Price = ?

Formula:

Bond Price = C * 1 - (1+r)^-n + F

r (1+r)^n

Solution:

Bond Price = 8,000 * 1 - (1 + 0.09)^-6 + 100,000

0.09 (1+0.09)^6

Bond Price = $95,514