Question

On December 31, 2019, Repsol Corp issued $1,400,000, 9%, 5-year bonds. Interest is payable semiannually on June 30 and December 31. The corporation uses the effective interest method of amortizing bond premium or discount. Using a financial calculator or excel, estimate the issue price of the bonds under the following three assumptions: (1) Market Rate is 9%
(2) Market Rate is 8%   

Answer 1

Required 1: Market rate is 9%

Interest is paid semi-anually, thus [YTM = 9/2 = 4.5%, N = 10]

Issue price = Interest * PVAF(4.5%,10years) + RV * PVF(4.5%,10th year)

= ($126,000 / 2) * 7.9127181768 + $1,400,000 * 0.64392768198

= $498,501 + $901,499

Issue price = $1,400,000.

Required 2: Market rate is 8%

Interest is paid semi-anually, thus [YTM = 8/2 = 4%, N = 10]

Issue price = Interest * PVAF(4%,10years) + RV * PVF(4%,10th year)

= ($126,000 / 2) * 8.11089577907 + $1,400,000 * 0.67556416878

= $510,986 + $945,790

Issue price = $1,456,776.