Question

On January 1, 2021, Frontier World issues $39.8 million of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride.

2-a. If the market rate is 8%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round interest rate factors. Enter your answers in dollars not in millions. Round "Market interest rate" to 1 decimal place. Round your final answers to the nearest whole dollar.)

Interest Payment = 15,92,000

Calculate issue price = ?

Answer 1

Answer:

Issue price of Bond = $39800000.

Explanation:

Face value = $39800000

Market interest rate = 8% / 2 = 4%

Semiannual period = 15 years x 2 = 30

Issue price of bonds = Interest Amount x Present value Annuity factor (r,n) + Face value x Present value interest factor (r,n)

= $1592000 x Present value Annuity factor (4% , 30 ) + $39800000 x Present value interest factor (4% , 30)

= $1592000 x 17.2920332+ $39800000 x 0.3083187

= $27528916 + $12271084

= $39800000.

Note:

When interest rate and market rate are the same then issue price will be equal to Face value i.e. $39.8 million.