James Corporation is planning to issue $501,000 worth of 10 percent bonds that m

Question

James Corporation is planning to issue $501,000 worth of 10 percent bonds that mature in 3 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.

Required:

Case A: Market (yield) rate, 8 percent

case B: Market (yield) rate, 10 precent

case C: Market (yield) rate, 12 precent

James Corporation is planning to issue $501,000 worth of 10 percent bonds that mature in 3 years. Interest payments are made each June 30 and December 31. All of the bonds will be sold on January 1, 2014. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided.

Explanation / Answer

n = 2*3 =6 ; FV = 501000 ; Coupon = 10% * 501000 /2 = 25050 ;

when market rate = 8%

PV of Bond = PVIFA(4%,6) * 25050 + PVIF(4%,6) * 501000

PV of Bond = 5.24 * 25050 + 501000 * 0.79 = $ 527052

when market rate = 10%

PV of Bond = 501000

This is because when market rate = coupon rate, then value of a bond today is equal to its face value

when market rate = 12%

PV of Bond = PVIFA(6%,6) * 25050 + PVIF(6%,6) * 501000

PV of Bond = 4.9173 * 25050 + 0.705 * 501000 = $ 476383

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