Question

On January 1, a company issues 8%, 5-year, $300,000 bonds that pay interest semiannually. On the issue date, the annual market rate of interest is 6%. The following information is taken from present value tables: Present value of an annuity (series of payments) for 10 periods at 3%8.5302 Present value of an annuity (series of payments) for 10 periods at 4%8.1109 Present value of 1 (single sum) due in 10 periods at 3%0.7441 Present value of 1 (single sum) due in 10 periods at 4%0.6756 What is the issue (selling) price of the bond

Answer 1

Answer: $‭325,592

Explanation:

Selling price of bond = Present value of coupon payments + Present value of Par value

No. of periods = 5 * 2 = 10 semi annual periods

Coupon payments = 300,000 * 8% * 1/2 = $12,000

Periodic interest = 6% / 2 = 3% per period

Selling price = (12,000 * Present value of annuity factor, 10 periods, 3%) + (300,000 * Present value of single sum, 10 periods, 3%)

= (12,000 * 8.5302) + (300,000 * 0.7441)

= $‭325,592