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Issue price of the bonds

On January 1, 2010, Lowry Co. issued ten-year bonds with a face value of \$5,000,000 and a stated interest rate of 8%, payable semiannually on June 30 and December 31. The bonds were sold to yield 10%. Table values are:

Present value of 1 for 10 periods at 8% 0.46319

Present value of 1 for 20 periods at 4% 0.45639

Present value of annuity for 10 periods at 8% 6.71008

Present value of annuity for 20 periods at 4% 13.59033

What should be the issue price of the bonds? Please provide a detailed, easy to understand calculation

Solution Preview

The issue price of the bonds is the present value of interest and principal discounted at the yield. The interest is payable semi annually and so the amount per semi-annual period is 5,000,000 principal amount X 8% stated rate X 6/12 for each 6 months = \$200,000. The principal amount is \$5,000,000

For semi-annual analysis, the discounting rate would be 10%/2 = 5% and ...

Solution Summary

The solution explains how to calculate the issue price of the bonds

\$2.19