On Jan 1, a company issues bonds with a par value of $300,000. The bonds mature

Question

On Jan 1, a company issues bonds with a par value of $300,000. The bonds mature in five years and pay 8% annual interest, payable each June 30 and December 31. On the issue datem the market rate of interest for the bonds is 10%. Compute the price of the bonds on their issue date. The following information is taken from present value tables.

Present value of an annuity for 10 periods at 4% ------- 8.1109
Present value of an annuity for 10 periods at 5% ------- 7.7217
Present value of 1 for 10 periods at 4% ------- 0.6756
Present value of 1 for 10 periods at 5% ------- 0.6139

Explanation / Answer

Price of the Bond PV of semmi annual intest for 5 yrs (WN1) 92660.4 PV of redemption amount ay end of 5 yrs (WN2) 184170 ISSUE PRICE OF BOND 276830.4 W.N 1 PV of semmi annual intest for 5 yrs (WN1) Semi annual rate of int = 8%/2 = 4% Annual Interest = $300000*4% = 12000$ Mkt rate of intt = 10% Half yearly Mkt ROI = 4% PV of interest payment = annual interest*PF of 5% for 10 periods = $12000*7.7217 = 92660.4 $ WN 2 PV of redemption amount ay end of 5 yrs = Redemption amt*PV of 5% at end of 10 period = $300000*0.6139 = 184170 $

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