Question

Ultimate Butter Popcorn issues 6%, 10-year bonds with a face amount of $56,000. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually. At what price will the bonds issue?

Answer 1

Issue price of bonds will be equal to sum of present value of semiannual interest payments and present value of matuarity value discounted at market interest rate. The issue price of bond is calculated as follows:-

Semiannual Interest Payment = Face Value*Interest rate*6/12

= $56,000*6%*6/12 = $1,680

No. of semiannual periods = 10 year*2 = 20

Relevant Market Interest Rate = 7%*6/12 = 3.5%

Issue Price of Bonds = PV of Interest Payments+PV of Matuarity Value

= [Interest Payments*PVAF(3.5%, 20)]+[Face Value*PVF(3.5%, 20)]

= ($1,680*14.2124)+($56,000*0.50257)

= $23,877+$28,144 = $52,021

Thus bonds will be issued at $52,021.