James Corporation is planning to issue $505,000 worth of 10 percent bonds that m

Question

James Corporation is planning to issue $505,000 worth of 10 percent bonds that mature in 4 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014.

Case A: Market (yield) rate, 8 percent.

Issue Price?

Case B: Market (yield) rate, 10 percent.

Issue Price?

Case C: Market (yield) rate, 12 percent.

Issue Price?

James Corporation is planning to issue $505,000 worth of 10 percent bonds that mature in 4 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014.

Case A: Market (yield) rate, 8 percent.

Issue Price?

Case B: Market (yield) rate, 10 percent.

Issue Price?

Case C: Market (yield) rate, 12 percent.

Issue Price?

Explanation / Answer

Case A: Market (yield) rate, 8 percent.

Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $25,250[PVIFA 4%, 8 Years] + $505,000[PVIF 4%, 8 Years]

= [$25,250 x 6.7327448] + [$505,000 x 0.7306902]

= $1,70,001.81 + $3,68,998.55

= $5,39,000.36

ISSUE PRICE = $5,39,000.36

Case B: Market (yield) rate, 10 percent.

Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $25,250[PVIFA 5%, 8 Years] + $505,000[PVIF 5%, 8 Years]

= [$25,250 x 6.463212] + [$505,000 x 0.67683936]

= $ 1,63,196.12 + $ 3,41,803.88

= $505,000

ISSUE PRICE = $5,05,000

If the Coupon rate and the Market Yield is same, then the Issue Price will be equal to the Face Value of the Bond

Case C: Market (yield) rate, 12 percent.

Issue Price of the Bond = Present Value of the Coupon Payments + Present Value of the Par Value

= $25,250[PVIFA 6%, 8 Years] + $505,000[PVIF 6%, 8 Years]

= [$25,250 x 6.209793] + [$505,000 x 0.627412]

= $ 1,56,797.29 + $ 3,16,843.25

= $ 4,73,640.54

ISSUE PRICE = $ 4,73,640.54

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