Round your answer to the nearest whole dollar and enter the value with numbers a

Question

Round your answer to the nearest whole dollar and enter the value with numbers and a comma. Do not enter a dollar sign, decimals, or omit the comma or your answer will be counted as incorrect.

1.

a. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 10%. The bonds pay interest annually. Compute the issue price of the bonds.

b.  ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest semi-annually. Compute the issue price of the bonds.

Explanation / Answer

Issue price=

Coupon amount × PVAF(i,n)+maturity amount×PVIF(i,n)

a)Since the coupon amount and the market interest rate is equal , the bond is trading at par. Hence, Bond issue price is equal to bond's face value i.e 500,000.

b)Issue price=25,000×PVAF(4.5%,20)+500,000×PVIF(4.5%,20)

=25,000×13+500,000×0.4146=532300

(Decimal sign is necessary to calculate PVIF)

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