Question

LaTanya Corporation is planning to issue bonds with a face value of $100,000 and a coupon rate of 8 percent. The bonds mature in seven years. Interest is paid annually on December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1)
Required: Compute the issue (sale) price on January 1 of this year for each of the following independent cases:

a. Case A: Market interest rate (annual): 8 percent.
b. Case B: Market interest rate (annual): 6 percent.
c. Case C: Market interest rate (annual): 9 percent.

Answer 1

Answer:

Case A:$100,000

Case B:$111,164.76

Case C:$94,967.05

Explanation:

The issue price of the bond can be computed using the excel pv formula stated below:

=-pv(rate,nper,pmt,fv)

Case A:

Rate is the market interest rate of 8%

nper is the number of coupon interest payable by the bond which is 7

pmt is the annual coupon interest of $8,000 (8%*$100,000)

fv is the face value of $100,000

=-pv(8%,7,8000,100000)=$100,000

Case B:

Rate is the market interest rate of 6%

nper is the number of coupon interest payable by the bond which is 7

pmt is the annual coupon interest of $8,000 (8%*$100,000)

fv is the face value of $100,000

=-pv(6%,7,8000,100000)=$111,164.76  

Case C:

Rate is the market interest rate of 9%

nper is the number of coupon interest payable by the bond which is 7

pmt is the annual coupon interest of $8,000 (8%*$100,000)

fv is the face value of $100,000

=-pv(9%,7,8000,100000)=$94,967.05