A company issued 6%, 20-year bonds with a face amount of $76 million. The market

Question

A company issued 6%, 20-year bonds with a face amount of $76 million. The market yield for bonds of similar risk and maturity is 7%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of S1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Enter your answers in whole dollars. Round final answers to the nearest whole dollar.) Table values are based on: n a 40 3.0% h Flow Amount Present Value Interest Principal S 76,000,000 Price of bonds

Explanation / Answer

Solution:

Face value of bond = $76 million = $76,000,000

Coupon rate = 6%, 3% semiannual

Market rate of interest = 7%, 3.5% semi annual

Maturity period = 20 years, 40 semiannual periods

Issue price of bond = Present value of interest and principal discounted at market rate of interest

= ($76,000,000 * 3%) * Cumulative PV factor at 3.5% for 40 periods + $76,000,000 * PV Factor at 3.5% for 40th period

= $2,280,000 * 21.35507 + $76,000,000 * 0.252572

= $67,885,073

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