Question

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.

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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0.467
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ff
3.0%
3.5%
6%
7%
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0.84197
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