Question

Williams Company plans to issue bonds with a face value of $607,000 and a coupon rate of 4 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are 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.) Determine the issuance price of the bonds assuming an annual market rate of interest of 4 percent.

Answer 1

Answer : Calculation of Issuance Price of Bond :

Present Value = [Coupn * PVAF @r% for n periods) + (Face Value * PVF @r% for nth period)

r is rate is the market interest rate i.e 4% / 2 = 2% (Divided by 2 as semiannual coupon payment)

n is number of years to maturity i.e 10 * 2 = 20 (Multiplied by 2 as semiannual coupon payment)

Coupon payment i.e 607000 * 4% = 24280 / 2 = 12140 (Divided by 2 as semiannual coupon payment)

Face value i.e 607000

Present Value = [12140 * PVAF @2% for 20 periods) + (607000 * PVF @2% for 20th period)

= [12140 * 16.3514333] + [607000 * 0.672971333]

= 198506.40 + 408493.599131

= 607000

Therefore as the coupon rate and market interest rate are same the issuance price will be same as Face value.