Question

10 years with a stated interest rate of 11% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 12%. Using present value tables, calculate the issue price of the bonds

Answer 1

Answer:= $471,325

Explanation:

Price of a bond = Present value of coupon payments + Present value of face value at maturity

Coupon payments = 500,000 * 11% * 1/2 years = $27,500  

Periodic yield = 12%/ 2 = 6% per semi annual period  

Periods = 10 * 2 = 20 semi annual periods

Coupon payment is constant so it is an annuity.  

Price of bond = Present value of annuity + Present value of face value at maturity  

= (Annuity * Present value interest factor of Annuity, 6%, 20 years) + Face value / (1 + rate) ^ number of periods  

= (27,500 * 11.4699) + 500,000 / (1 + 6%)²⁰  

= $471,325