Question

1. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 11%. The bonds pay interest annually. Compute the issue price of the bonds.(I tried 470552, 470124, 470450 are wrong answers)

2. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest semi-annually. Compute the issue price of the bonds.(WRONG 532498, 106504 532300)

Please give a correct answer. Thanks

Answer #1

Answer to Question 1:

Par Value = $500,000

Time to Maturity = 10 year

Annual YTM = 11%

Annual Coupon Rate = 10%

Annual Coupon = 10% * $500,000

Annual Coupon = $50,000

Price of Bond = $50,000 * PVIFA(11%, 10) + $500,000 * PVIF(11%,
10)

Price of Bond = $50,000 * (1 - (1/1.11)^10) / 0.11 + $500,000 /
1.11^10

Price of Bond = $470,554

So, Issue price of the bond is $470,554

Answer to Question 2:

Par Value = $500,000

Time to Maturity = 10 year

Semiannual Period to Maturity = 20

Annual YTM = 9%

Semiannual YTM = 4.50%

Annual Coupon Rate = 10%

Semiannual Coupon Rate = 5.00%

Semiannual Coupon = 5.00% * $500,000

Semiannual Coupon = $25,000

Price of Bond = $25,000 * PVIFA(4.50%, 20) + $500,000 *
PVIF(4.50%, 20)

Price of Bond = $25,000 * (1 - (1/1.045)^20) / 0.045 + $500,000 /
1.045^20

Price of Bond = $532,520

So, Issue price of the bond is $532,520

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