Question

Matt Enterprises issued $200,000 of ten percent, five-year bonds with interest payable semiannually. Determine the issue price if the bonds are priced to yield (a) ten percent, (b) six percent, and (c) 12 percent.

Answer 1

Answer:

$200,000 ; $234,120.81  ; and $185,279.83

Explanation:

For computing the issue price we need to applied the future value which is shown in the attachment below:

a. Given that,  

Future value = $200,000

Rate of interest = 10%  ÷ 2 = 5%

NPER = 5  years  × 2 = 10 years

PMT = $200,000 × 10%   ÷ 2 = $10,000

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, applying the formula the issued price is $200,000

b. Given that,  

Future value = $200,000

Rate of interest = 6%  ÷ 2 = 3%

NPER = 5  years  × 2 = 10 years

PMT = $200,000 × 10%   ÷ 2 = $10,000

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, applying the formula the issued price is $234,120.81

c. Given that,  

Future value = $200,000

Rate of interest = 12%  ÷ 2 = 6%

NPER = 5  years  × 2 = 10 years

PMT = $200,000 × 10%   ÷ 2 = $10,000

The formula is shown below:

= -PV(Rate;NPER;PMT;FV;type)

So, applying the formula the issued price is $185,279.83