Question

Calculate market price of a bond. On January 1, 2017 Lance Co. issued five-year bonds with...

Calculate market price of a bond.

On January 1, 2017 Lance Co. issued five-year bonds with a face value of $1,000,000 and a stated interest rate of 12% payable semiannually on July 1 and January 1. The bonds were sold to yield 10%. Present value table factors are:

         Present value of 1 for 5 periods at 10%                                                                      .62092

         Present value of 1 for 5 periods at 12%                                                                      .56743

         Present value of 1 for 10 periods at 5%                                                                      .61391

         Present value of 1 for 10 periods at 6%                                                                      .55839

         Present value of an ordinary annuity of 1 for 5 periods at 10%                                3.79079

         Present value of an ordinary annuity of 1 for 5 periods at 12%                                3.60478

         Present value of an ordinary annuity of 1 for 10 periods at 5%                               7.72173

         Present value of an ordinary annuity of 1 for 10 periods at 6%                                7.36009

Calculate the issue price of the bonds.

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Answer #1
Amount PV factor @ 5% Present value
Semi-annual interest 60000 7.72173 463304
Maturity value 1000000 0.61391 613910
Issue price of the bonds 1077214
Issue price of the bonds = $1077214
Working:
Semi-annual interest = 1000000*12%*6/12 = $60000
PV factors used for semi annual interest is Present value of an ordinary annuity of 1 for 10 periods at 5%
PV factor used for maturity value is Present value of 1 for 10 periods at 5%
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