Question

BECCA COMPANY is considering the issue of $102,000 face value, ten-year term bonds. The bonds will pay 6% interest each December 31. The current market rate is 6%; therefore, the bonds will be issued at face value.

Required:

1. For each of the following situations, indicate whether you believe the company will receive a premium on the bonds or will issue them at a discount or at face value.

a. Interest is paid semiannually instead of annually.
Face value

b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
Discount

2. For each situation in part (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b). Do not round intermediate computation and round your final answer to the nearest dollar.

Here are some time value of money factors:
Present value of an annuity, n=10, i=7%, PV=7.02358
Present value of an annuity, n=20, i=3%, PV=14.87747
Present value of a single amount, n=10, i=7%, PV=0.50835
Present value of a single amount, n=20, i=3%, PV=0.55368

	Proof: Bond Price
a.	$
b.	$

Answer 1

1
a	Interest is paid semiannually instead of annually.
	As long as the market Interest on the bonds s same as its
	Coupon rate, the bond will be issued at its face value and the
	frequency of payment of Interest does not effect the issue price
	of the bond.
b	Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
	In this case, Since similar bonds in the market are yielding more than this bond, then
	it should be issued on Discount to make it even with the market bonds. So its issued on
	Discount.
2
		Proof: Bond Price	PV of Interest	PV of Principal
	a.	102000	102000*0.03*14.87747	102000*0.55368
	b.	94836	102000*0.06*7.02358	102000*0.50835