Answer:
The issue price of the bond is the present value of the future cash flows of the bond,which is $2,162,217.92.
The calculation of the issue price is shown below.
Explanation
The bond will pay interest of $100000 for 10 periods plus $2000000 par at the end of the tenth period.
The formula applicable is: Future value of each period multiplied by applicable discounting factor.
Even though the bond is issued for only 5 years,but the fact that it pays interest semi-annually makes it 10 period duration(5years*2).
Interest rate should also be adjusted to show the time horizon of six month each by dividing 8% per year by 2.
The detailed computation of present value is as follows:
Periods Coupon Interest @10%/2 DCF=1/(1+r)^n PV
1.00 100,000.00 0.9615 96,153.85
2.00 100,000.00 0.9246 92,455.62
3.00 100,000.00 0.8890 88,899.64
4.00 100,000.00 0.8548 85,480.42
5.00 100,000.00 0.8219 82,192.71
6.00 100,000.00 0.7903 79,031.45
7.00 100,000.00 0.7599 75,991.78
8.00 100,000.00 0.7307 73,069.02
9.00 100,000.00 0.7026 70,258.67
10.00 2,100,000.00 0.6756 <u>1,418,684.75</u>
<u> 2,162,217.92</u>
