Question

Bushman, Inc., issues $400,000 of 8% bonds that pay interest semiannually and mature in 10 years....

Bushman, Inc., issues $400,000 of 8% bonds that pay interest semiannually and mature in 10 years. Compute the bond issue price assuming that the prevailing market rate of interest is 8% per year compounded semiannually.

Group of answer choices

$381,293

$436,172

$356,648

$400,000

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Homework Answers

Answer #1

Answer is $400,000

Face Value of Bonds = $400,000

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $400,000
Semiannual Coupon = $16,000

Time to Maturity = 10 years
Semiannual Period = 20

Annual Market Rate = 8.00%
Semiannual Market Rate = 4.00%

Issue Price of Bond = $16,000 * PVA of $1 (4.00%, 20) + $400,000 * PV of $1 (4.00%, 20)
Issue Price of Bond = $16,000 * 13.590326 + $400,000 * 0.456387
Issue Price of Bond = $400,000

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