Question

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 1

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