Question

# 14.. Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6%...

14.. Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of \$500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bonds?

A. \$537,194.

B. \$464,469.

C. \$538,973.

D. \$500,000.

PV 1 2.5% 20pds .61027 PVA 2.5% 20pds 15.56816 PV 1 3% 10pds .74409 PV A 3% 20pds 14.87747

 Answer: Semiannual period = 10 x 2 = 20 periods Semiannual interest rate = 6% / 2    = 3% Semiannual market Interest rate = 5% / 2 = 2.5% Interest Amount = \$ 500,000 x 6% x 6 /12 = \$ 15,000 Issue price of Bond         = Interest Amount x PVAF ( 2.5%, 20 periods ) + Face Value x PVF ( 2.5%, 20 periods )         =    (\$ 15,000 x 15.56816 ) + (\$ 500,000 x 0.61027)         =      \$ 233,522.40 + \$ 305,135         =       \$ 538,657.40         =     \$ 538,973 (option Closes to ) Option (C ) is Correct

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