Question

If the market rate is 10%, calculate the issue price. bond characteristics amount face amount 40,100,000...

If the market rate is 10%, calculate the issue price.

bond characteristics

 amount
face amount 40,100,000
interest payment 1,804,500
market interest rate 5.0%
periods in maturity 40
issue price ?
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Homework Answers

Answer #1

The Market rate 10% is per annum and half yearly interest rate will be 5% as given .

So the issue price will be present value of all the interest payments + present value of bond redemption payments

$ 1804500* PVAF(5%, 40)+ $40100000* PVIF(5%, 40)

($ 1804500*17.16)+ ($ 40100000*.1420)

= $ 30963571.3196 + $5696031.85633

= $ 36659603.1758

The Interest payment are 4.5% (1804500/40100000) which is less than market rate .

The Market interest rate is high which leads LOWER ISSUE PRICE of bonds.

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