Question

LaTanya Corporation is planning to issue bonds with a face value of $100,000 and a coupon rate of 8 percent. The bonds mature in seven years. Interest is paid annually on December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

Compute the issue (sale) price on January 1 of this year for each of the following independent cases:

a. Case A: Market interest rate (annual): 8 percent.

b. Case B: Market interest rate (annual): 6 percent.

c. Case C: Market interest rate (annual): 9 percent.

Answer 1

a. $100,000.00

b.$ 111,164.76

c.$ 94,967.05

Step-by-step explanation:

The price of the bond can be computed using the pv function in excel as stated below:

=-pv(rate,nper,pmt,fv)

rate is the market interest rate

nper is the number of annual coupons the bond would pay which is 7 coupons in seven years

pmt is the annual coupon amount=$100,000*8%=$8,000

fv is the face value of the bond

at 8%:

=-pv(8%,7,8000,100000)=$ 100,000.00

at 6%:

=-pv(6%,7,8000,100000)=$ 111,164.76

at 9%:

=-pv(9%,7,8000,100000)=$ 94,967.05