James Corporation is planning to issue bonds with a face value of $500,500 and a

Question

James Corporation is planning to issue bonds with a face value of $500,500 and a coupon rate of 6 percent. The bonds mature in 15 years and pay interest semiannually every June 30 and 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) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) Required 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): 4 percent Issue price b. Case B: Market interest rate (annual): 6 percent. Issue price c. Case C: Market interest rate (annual): 8.5 percent. ssue price

Explanation / Answer

Solution: Computation of Issue Price a) Case A: Market Interest rate (annua): 4 percent Present Value factor @4% semiannually for 15 years PVAF = (2%,30) = 22.3964555479 Semi Annual Interset = (500500*3%) = 15015 So peresent value of interest = (15015*22.3964555479) = 336282.78 Discountinf factor @2% at 30 th terms = 0.55207088885 So present value of the principal amount = 500500*0.55207088885 = 276311.48 So the issue price of the bond is = (336282.78+276311.48) = $612593 b) Case B: Market Interest rate (annua): 6 percent Present Value factor @6% semiannually for 15 years PVAF = (3%,30) = 19.6004413468 Semi Annual Interset = (500500*3%) = 15015 So peresent value of interest = (15015*19.6004413468) = 294300.63 Discountinf factor @3% at 30 th terms = 0.41198676 So present value of the principal amount = 500500* 0.41198676 = 206199.33 So the issue price of the bond is = (294300.63+2016199.33) = $500500 c) Case C: Market Interest rate (annua): 8.5 percent Present Value factor @8.5% semiannually for 15 years PVAF = (4.25%,30) = 16.779017163 Semi Annual Interset = (500500*3%) = 15015 So peresent value of interest = (15015*16.779017163) = 251936.94 Discountinf factor @4.25% at 30 th terms = 0.28689177037 So present value of the principal amount = 500500*0.28689177037 = 143589.33 So the issue price of the bond is = (251936.94+143589.33) = $395526

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