Question

A company issued 6%, 10-year bonds with a face amount of $90 million. The market yield for bonds of similar risk and maturity is 7%. Interest is paid semiannually. At what price did the bonds sell? (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided. Enter your answers in whole dollars. Round final answers to the nearest whole dollar.)

Answer 1

Answer:

The bonds sold at: $122,106,600 dollars

Explanation:

We will calculate the present value of the coupon payment and the maturirty at market rate of 7%

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

C         2.7(90 millions x 6% / 2 payment per year)

time 20  10 years and 2 payment per year

discounted at market rate: 7% divide by 2 payment per year:  0.035

$2.7 \times \frac{1-(1+0.035)^{-20} }{0.035} = PV$

PV 76.3551

Then present value of maturity:

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

Maturity   90.00

time            10 years

rate             0.07

$\frac{90}{(1 + 0.07)^{10} } = PV$  

PV   45.75

PV coupon  $76.3551

PV maturity  $45.7514

Total  $122.1066