Question

Seaside issues a bond with a stated interest rate of 10%, face value of $50,000, and due in 5 years. Interest payments are made semi-annually. The market rate for this type of bond is 12%. What is the issue price of the bond (rounded to nearest whole dollar?

Answer 1

Answer:

Total $46,319.9565

Explanation:

We need to calculate the value of the present value of the bond payment

and the maturity using the current market rate

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 2500 (50,000 x 0.10/2)

time 10 (5 years 2 payment per year)

rate 0.06     (12% annual --> divide by 2 to convert semiannual)

$2500 \times \frac{1-(1+0.06)^{-10} }{0.06} = PV$

PV $18,400.2176

$\frac{Maturity}{(1 + rate)^{time} } = PV$

Maturity 50000

time 10

rate           0.06

$\frac{50000}{(1 + 0.03)^{10} } = PV$

PV   $27,919.7388

PV bond interest payment  $18,400.2176

PV maturity payment       $27,919.7388

Total $46,319.9565