A company issued 6%, 15-year bonds with a face amount of $67 million. The market yield for bonds of similar risk and maturity is 6%. 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 $1 and PVAD of $1)

Question

Makena Holloway

Chemistry

13 December, 16:13

A company issued 6%, 15-year bonds with a face amount of $67 million. The market yield for bonds of similar risk and maturity is 6%. 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 $1 and PVAD of $1)

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Answers (1)

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Cale Fitzpatrick · Answer 1

Bond is expected to be sold at the face value.

Explanation

In cases where market interest rate of bond is lower than coupon rate of bond, the bond is issued at a premium. Reason being that company is giving higher interest rate on bond, this higher rate of interest increases the price of bond, thus, bond is issued at premium.

In a scenario where market interest rate of bond is higher than coupon rate of bond, the bond is issued at Discount. This is so in that company is not returning more than market rate, therefore, to compensate that, the sale value of bond is usually lower than face value.

If the Market rate and coupon rate is equal, then bond will be issued at face value.

Considering the given question, Coupon rate of bond is 6% and market rate is also 6%. In this question, Market yield is considered to be market rate.

Therefore, there is no need to calculate present value of interest payments and redemption value at maturity to calculate price of bond.