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Licemer1 [7]
3 years ago
13

Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments

are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bonds

Business
1 answer:
tino4ka555 [31]3 years ago
7 0

Answer:

The bonds are issued at a price of $538972.91

Explanation:

To calculate the price of the bond, we need to first calculate the coupon payment per period. We assume that the interest rate provided is stated in annual terms. The bonds are semi annual so the coupon payment is per six months.

Coupon Payment = 500000 * 0.06 * 6/12  = $15000

Total periods = 10 * 2 = 20

Semi Annual market interest rate = 5% /2 = 2.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 15000 * [( 1 - (1+0.025)^-20) / 0.025]  +  500000 / (1+0.025)^20

Bond Price = $538972.9057

The bonds are issued at a price of $538972.9057 rounded off to $538972.91

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