Ultimate Butter Popcorn issues 7%, 20-year bonds with a face amount of $44,000.

Question

Ultimate Butter Popcorn issues 7%, 20-year bonds with a face amount of $44,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually.

At what price will the bonds issue? (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors.)

Face Amount -

Interest Payment -

Market Interest Rate -

Periods to Maturity -

Issue Price -

Ultimate Butter Popcorn issues 7%, 20-year bonds with a face amount of $44,000. The market interest rate for bonds of similar risk and maturity is 6%. Interest is paid semiannually.

Explanation / Answer

Bond Price = C * [1 - 1/(1+i)^n] / i + m/(1+i)^n

where, C = coupon payment(interest payment) = 7% * $44000 * 1/2 = $1540

i = market interest rate = 6%/2 = 3%

n = periods to maturity = 20 years * 2 = 40

m = face value = $44000

Issue price = 1540 * [1- 1/(1+.03)^40] / .03 + 44000/(1+.03)^40

= 35596.75 + 13488.50 = $49085.25

The bond will be issued at a price of $49085.25

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