Question

Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semiannually. At the time of issue, the market rate for such bonds is 10%.

Answer 1

Answer:

$468,844 approx.

Explanation:

Assumption: Since the question is incomplete, with the available information it has been construed that calculation of bond price is required and the question has been solved accordingly.

The price of a bond is the present value of future cash receipts it generates to the investor in the form of interest stream and principal stream.

$B_{0} = \frac{i}{(1\ +\ ytm)^{1} }\ +\ \frac{i}{(1\ +\ ytm)^{2} }\ +.....+\frac{i}{(1\ +\ ytm)^{n} } \ + \frac{RV}{(1\ +\ ytm)^{n} }$

wherein,

$B_{0}$ = price of bond as on today

i = annual coupon payments

ytm= investor's expectation of interest or market rate of interest on similar bonds

RV = Redemption value of such bonds assumed to be the face value

n = term to maturity

$B_{0} = \frac{22500}{(1\ +\ .05)^{1} }\ +\ \frac{22500}{(1\ +\ .05)^{2} }\ +.....+\frac{22500}{(1\ +\ .05)^{20} } \ + \frac{500000}{(1\ +\ .05)^{20} }$

$B_{0}=$ 12.46221  × 22,500 + 0.376889 × 22,500 = 280,399.725 + 188444.5

$B_{0} =$ $468,844 approx

This is the present value of the bond which is lower than it's face value because market rate of return of similar bonds is higher than the coupon rate of payment by Westside Corporation.