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15 February, 23:32

James Corporation is planning to issue bonds with a face value of $500,000 and a coupon rate of 6 percent. The bonds mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor (s) from the tables provided. Round your final answer to whole dollars.)

Required:

Compute the issue (sale) price on January 1 of this year for each of the following independent cases:

a. Case A: Market interest rate (annual) : 4 percent.

b. Case B: Market interest rate (annual) : 6 percent.

c. Case C: Market interest rate (annual) : 8.5 percent.

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Answers (1)
  1. 15 February, 23:48
    0
    Case A $581,757.17

    Case B $500,000.00

    Case C $416,910.21

    Explanation:

    Current price of a bond

    The market price of a bond can be computed using the pv formula in excel, which is given as:

    =pv (rate, nper, pmt, fv)

    Where rate is the yield to maturity on the bond divided by 2 since the bond in question is semi-annual interest paying bond i. e

    Case A 4%/2=2%

    Case B 6%/2=3%

    Case C 8.5%/2=4.25%

    The nper is the time to maturity of the bond multiplied by 2 for the same reason cited for yield to maturity i. e 10 years * 2=20

    The pmt is the semi-annual coupon interest payable by the bond i. e 6%/2*$500,000=$15,000

    The fv is the future value of the bond given as $500,000

    Case A

    =-pv (2%,20,15000,500000)

    Pv = 581,757.17

    Case B

    =-pv (3%,20,15000,500000)

    PV=$$500,000.00

    Case C

    =-pv (4.25%,20,15000,500000)

    PV=$416,910.21
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