Question

Use the following to answer questions 1 – 3 (Round answers to the nearest dollar)

BA Corp issues 5.0%, 10-year bonds with a total face amount of $1,000,000. The market interest rate for bonds of similar risk and maturity is 5.1%. Interest is paid annually. DO NOT ROUND YOUR ANSWERS UNTIL YOU FULLY COMPLETE THE PROBLEM SET.

1.    $___________How much will be paid in interest each interest payment?                                         

2.    $___________ (rounded to nearest dollar). What is the present value of the interest payments?       

3.    $___________ (rounded to nearest dollar). What is the issue price of the bond?                             

Answer 1

1. The face value=$1,000,000

Interest payment/coupon payment in each year=5%*(1,000,000)=$50,000

2. The present value of the interest payments can be found by discounting all the Interest payments for 10 years with a discount rate of 5.1%.

This can be found using NPV function in EXCEL

=NPV(rate, Year1 to Year10 cashflows)

rate=5.1%

We can also find using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=5.1%

nper=number of periods=10

pmt=50000

=PV(5.1%,10,50000,0,0)

present value=$384,218.66

3. Price of a bond have to find using PV function in EXCEL

=PV(rate,nper,pmt,fv,type)

rate=5.1%

nper=number of periods=10

pmt=50000

fv=1000000

=PV(5.1%,10,50000,1000000,0)

PV=$992,315.63

The issue price of a bond=$992,315.63