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Homework answers / question archive / James Corporation is planning to issue bonds with a face value of $504,000 and a coupon rate of 6 percent
James Corporation is planning to issue bonds with a face value of $504,000 and a coupon rate of 6 percent. The bonds mature in ? years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January of this yeux ! PV of $1. EVA of $1. and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.) HE 38.14 Required: Compute the issue (sales) price on January 1 of this year for each of the following independent cases: a. Case A: Market interest rate (annual): 4 percent Issue price b. Case B: Market interest rate (annual): 6 percent. Issue price c. Case C: Market interest rate (annual): 8.5 percent Issue price Next > 23 of 26 !!
Determination of Issue Price of Bonds on January 1 of this year :-
Face Value of Bonds = $504,000
Life of Bond (in years) = 7
Maturity amount of Bond $504,000
Coupon rate = 6% per year payable semi annually i.e. 3% per semi annual
Semi annual Coupon Amount = $504,000 × 3%
= $15,120 This will be paid 14 times
n = 7 years i.e. 7 * 2 = 14 semi annuals
Case A : Market Interest Rate (annual) : 4 percent
Market rate on similar bonds (r) = 4%
= 2% semi annual
PVAF(r, n) = Present Value Annuity factor at r% for n periods
Present Value of an Annuity of $1 at 2% for 14 periods = 12.1062488
PVIF(r, n) = Present Value interest factor at r% for n periods
Present Value of $1 at 2% at n= 14 periods = 0.7578750
Price of Bond = Coupon Amount * PVAF(r,n) + Redemption Amount * PVIF(r,n)
= $15120* 12.1062488 + $504000* 0.757875
= $183047 + $381969
= $565016
Case B : Market Interest Rate (annual) : 6 percent
Market rate on similar bonds (r) = 6%
= 3% semi annual
PVAF(r, n) = Present Value Annuity factor at r% for n periods
Present Value of an Annuity of $1 at 3% for 14 periods = 11.296073
PVIF(r, n) = Present Value interest factor at r% for n periods
Present Value of $1 at 3% at n= 14 periods = 0.661118
Price of Bond = Coupon Amount * PVAF(r,n) + Redemption Amount * PVIF(r,n)
= $15120* 11.296073 + $504000* 0.661118
= $170797+ $333203
= $504000
Case C : Market Interest Rate (annual) : 8.5 percent
Market rate on similar bonds (r) = 8.5%
= 4.25% semi annual
PVAF(r, n) = Present Value Annuity factor at r% for n periods
Present Value of an Annuity of $1 at 4.25% for 14 periods = 10.390900
PVIF(r, n) = Present Value interest factor at r% for n periods
Present Value of $1 at 4.25% at n= 14 periods = 0.558387
Price of Bond = Coupon Amount * PVAF(r,n) + Redemption Amount * PVIF(r,n)
= $15120* 10.390900 + $504000* 0.558387
= $157110 + $281427
= $438537
