Answer:
See below.
Explanation:
To make the calculations for issue prices we need to identify Net present value of the bonds.
This can be done as follows,
NPV = (Coupon rate of bond * annuity 10 years @ MR) + Par value * PV
where, MR = market rate and PV = present value factor at time of maturity.
1-a)
Annuity factor for 10 years @ 6% market rate = 7.3601
PV factor for 10th year @ 6% market rate = 0.5584
Coupon rate = 26*0.07 = $1.82 million
Issue Price = (1.82 * 7.3601) + 27*0.5584 = $28 million rounded off.
1-b)
Annuity factor for 10 years @ 7% market rate = 7.024
PV factor for 10th year @ 6% market rate = 0.5083
Coupon rate = 26*0.07 = $1.82 million
Issue Price = (1.82 * 7.024) + 27*0.5083 = $26.5 million rounded off.
1-c)
Annuity factor for 10 years @ 8% market rate = 6.710
PV factor for 10th year @ 6% market rate = 0.4632
Coupon rate = 26*0.07 = $1.82 million
Issue Price = (1.82 * 6.710) + 27*0.4632 = $24.7 million rounded off.
Hope that helps.
