Question

Issue Price

The following terms relate to independent bond issues:

1. 570 bonds; $1,000 face value; 8% stated rate; 5 years; annual interest payments
2. 570 bonds; $1,000 face value; 8% stated rate; 5 years; semiannual interest payments
3. 860 bonds; $1,000 face value; 8% stated rate; 10 years; semiannual interest payments
4. 1,990 bonds; $500 face value; 12% stated rate; 15 years; semiannual interest payments

Use the appropriate present value table:

PV of $1 and PV of Annuity of $1

Required:

Assuming the market rate of interest is 10%, calculate the selling price for each bond issue. If required, round your intermediate calculations and final answers to the nearest dollar.

Situation	Selling Price of the Bond Issue
a.	$
b.	$
c.	$
d.	$

Answer 1

Solution:

Issue price of bond =(Face value * PVF of Market rate * Years of maturity) +( Interest Paid * PVAF of Market rate * Year of Maturity). Here market rate of interest is 10%

a. $1,000*0.6209 + $1,000*8%*3.7908 = $924.16 Selling price for bond issue = $924.16*570 = $526,771

Here interest payments are semiannual so period will get double , and interest rate and market rate will reduced to half

i.e market rate here is 5%

b.$1,000*0.6139 + $1,000*4%*7.7217 = $922.77 Selling price for bond issue = $922.77*570 = $525,979

c.$1,000*0.3769 + $1,000*4%*12.4622 = $875.39 Selling price for bond issue = $875.39*860 = $752,835

d.$500*0.2314 + $500*6%*15.3725 = $576.88 Selling price for bond issue = $576.88*1,990 = $1,147,991