On February 28, 2012, Snapper Corp. issues 10%, 10-year bonds payable with a fac
ID: 2712168 • Letter: O
Question
On February 28, 2012, Snapper Corp. issues 10%, 10-year bonds payable with a face value of $1,500,000. The bonds pay interest on February28 and August 31. Snapper Corp. amortizes bonds by the straight-line method. Read the requirements. Requirement 1. If the market interest rate is 9% when Snapper Corp. issues its bonds! will the bonds be priced at par, at a premium, or at a discount? Explain. The 10% bonds issued when the market interest rate is 9% will be priced at. They are in this market, so investors will pay to acquire them.Explanation / Answer
Price of the bond when the market interest is 9% is equal to PV of its future interest payments + PV of Face Value at maturity ie. $ Coupon(1-(1+i)^-n/I + FV/(1+i)^n where, $ coupon is the semi-annual interest in $ ie. 1500000*10%/2=$ 75000 i= semi-annual I ie. 0.09/2=0.045 n= no.of semi-annual periods to maturity ie. 10*2= 20 FV = Face value= $ 1500000 Substituting these values in the formula, we have, Price=(75000*((1-(1+0.045)^-20)/0.045))+(1500000/(1+0.045)^20) 1597559.523 As the market interest is less than the coupon rate, the bonds sell for a higher price than the Face value, ie. At premium. The bonds are priced at a premium The 10% bonds issued when the market interest rate is 9% will be priced at premium.They are dearer in this market, so investors will pay premium to acquire them.
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