Question

Trew Company plans to issue bonds with a face value of $ 900,000 and a coupon rate of 6 percent. The bonds will mature in 10 years and pay interest semiannually every June 30 and December 31. All of the bonds are sold on January 1 of this year. Determine the issuance price of the bonds assuming an annual market rate of interest of 8.5 percent.

Answer 1

r = (8.5:2) = 4.25% (because interest is paid semiannually)

n = 10 * 2 = 20 (compounded twice a year)

Present value of principal

(900000 * PVF (4.25% , 20))

391491

900000*0.43499)

Interest Present Value

(900000*6%*6/12)*PVA(4.25%,20))

358949

27000*13.2944)

Issue Price 750440.

Interest is the amount paid by the borrower or deposit-taking financial institution to the lender or depositor in excess of the repayment of the principal (that is, the amount borrowed) at a specified rate.

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