Question

On November 1, 2015, Ybarra Construction Company issued $400,000 of 5-year bonds that pay interest at an annual rate of 5%. The interest payments are due every six months (that is, the interest is compounded semi-annually). At the end of the five-year period, Ybarra must pay the bond holders a balloon payment of $400,000. a. What would the issue price of the bonds be if the prevailing interest rate is: Round answers to the nearest whole number.

Answer 1

Answer:

the question is incomplete, but I can give two examples of interest rate being higher or lower:

For example, interest rate is 6%

PV of face value = $400,000 / (1 + 3%)¹⁰ = $297,637.57

PV of coupon payments = $10,000 x 8.5302 (PVIFA, 3%, 10 peridos) = $85,302

Market price = $382,939.57

Second example, interest rate is 4%

PV of face value = $400,000 / (1 + 2%)¹⁰ = $328,139.32

PV of coupon payments = $10,000 x 8.9826 (PVIFA, 2%, 10 peridos) = $89,823

Market price = $417,962.32