Valuing Bonds Using Present Value
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Use the present value tables in the appendix (files attached) on the future value and present value tables to calculate the issue price of a $600,000 bond issue in each of the following independent cases. Assume interest is paid semiannually.
a. A 10-year, 8 percent bond issue; the market interest rate is 10 percent.
b. A 10-year, 8 percent bond issue; the market interest rate is 6 percent.
c. A 10-year, 10 percent bond issue; the market interest rate is 8 percent.
d. A 20-year, 10 percent bond issue; the market interest rate is 12 percent.
e. A 20-year, 10 percent bond issue; the market interest rate is 6 percent.
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The solution explains how to calculate the price of bonds
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The price of the bond would be the present value of interest and principal.
a. A 10-year, 8 percent bond issue; the market interest rate is 10 percent.
The interest amount is 600,000X8%/2 = 24,000 for each semi annual period. Periods to maturity are 10X2=20. Principal amount is $600,000 and the discounting rate is 10%/2=5%. Interest is an annuity and so we use the PVIFA table. For principal amount we use the PVIF table
Issue Price = 24,000 X PVIFA (20,5%) + 600,000 X PVIF (20,5%)
Issue price = 24,000X12.4622 + 600,000 X 0.3769
Issue Price = $525,323.80
b. A 10-year, 8 percent bond issue; the market interest ...
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