Question

Kelly Industries issued 9% bonds, dated January 1, with a face value of $150,000 on January 1, 2021. The bonds mature in 2031 (10 years). Interest is paid semiannually on June 30 and December 31. For bonds of similar risk and maturity the market yield is 11%. What was the issue price of the bonds? 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.)

Answer 1

Price of Bonds= $132,074.43

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).

Value of Bond = PV of interest + PV of RV

Semi -annual Interest Payment = 9%× 150,000 × 1/2 = 6750

Semi-annual market yield = 11%/2 = 5.5%

Present Value = PV of interest payment = A× (1+r)^(-n)/ r

A- interest payment= r- semi annual yield - 5.5%, n- number of periods - 2× 10 = 20

PV of interest payment = 6750 × (1 - 1.055^(-20))/0.055= 80,665.08

PV of Redemption Value = Face Value × (1+r)^(-n)

= 150,000 × (1.055)^(-20)= 51,409.34

Price of Bonds = 51,409.34 + 80,665.08 = $132,074.43

Price of Bonds= $132,074.43