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Homework answers / question archive / the total face value of these bonds is $1,000,000 and they bear interest at 8% payable semi-annually on December 31 and June 30
the total face value of these bonds is $1,000,000 and they bear interest at 8% payable semi-annually on December 31 and June 30. The market rate of interest for this similar bond is 10%. The bonds have a term of 10 years and were issued on January 1, 2017 which is the date noted on the face value of the bond.
Required:
Part A (4 MARKS): What is the present value of this bond issue?
Part B (4 MARKS): What would the present value of the bonds be if the market rate of interest was 6% instead?
Assuming the same facts: The Solar Power Equipment Sales Company has decided to fund its new solar project with a bond issue. The total face value of these bonds is $1,000,000 and they bear interest at 8% payable semi-annually on January 1st and July 1st. The market rate of interest for this similar bond is 10%. The bonds have a term of 10 years and were issued on January 1, 2017 which is the date noted on the face value of the bond.
Part C (4 MARKS): What is the present value of the bond issued?
Part D (4 MARKS): What would the present value of the bonds be if market rate of interest was 6% instead?
A. Computation of Present Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Present Value = ?
Rate = Market Rate of Interest = 10%/2 = 5% compounded semiannually
Nper = Number of Periods to Maturity = 10 Years * 2 = 20 Periods
PMT = Periodic Coupon Payment = $1,000,000*8%/2 = $40,000
FV = Face Value = $1,000,000
Substituting the values in formula:
=-pv(5%,20,40000,1000000)
PV or Present Value = $875,377.90
B. Computation of Present Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Present Value = ?
Rate = Market Rate of Interest = 6%/2 = 3% compounded semiannually
Nper = Number of Periods to Maturity = 10 Years * 2 = 20 Periods
PMT = Periodic Coupon Payment = $1,000,000*8%/2 = $40,000
FV = Face Value = $1,000,000
Substituting the values in formula:
=-pv(3%,20,40000,1000000)
PV or Present Value = $1,148,774.75
C. Computation of Present Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv,type)
Here,
PV = Present Value = ?
Rate = Market Rate of Interest = 10%/2 = 5% compounded semiannually
Nper = Number of Periods to Maturity = 10 Years * 2 = 20 Periods
PMT = Periodic Coupon Payment = $1,000,000*8%/2 = $40,000
FV = Face Value = $1,000,000
type = 1
Substituting the values in formula:
=-pv(5%,20,40000,1000000,1)
PV or Present Value = $900,302.32
D. Computation of Present Value of Bonds using PV Function in Excel:
=-pv(rate,nper,pmt,fv,type)
Here,
PV = Present Value = ?
Rate = Market Rate of Interest = 6%/2 = 3% compounded semiannually
Nper = Number of Periods to Maturity = 10 Years * 2 = 20 Periods
PMT = Periodic Coupon Payment = $1,000,000*8%/2 = $40,000
FV = Face Value = $1,000,000
type =1
Substituting the values in formula:
=-pv(3%,20,40000,1000000,1)
PV or Present Value = $1,166,627.72
