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Magazine Chapter 14: Q14-1BE (page 753)
BE14-1 (L01) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi-annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.
Short Answer
The issue price of the bonds is$468,845.
Step by step solution
Meaning of Issue Price
The issue price of a bond is based on the relationship between the interest rate that the bonds pay and themarket interest ratebeing paid on the same date. The issue price of the bond is the price at which the bond issuer originally sells the bonds.
Calculation of the issue price of the bonds
Semi-annual interest (500,000 脳 9% 脳 6/12) = $22,500
Period (10 years 脳 2) = 20 periods
Semi-annual yield = (10% 脳 0.5) = 0.05
Present value of interest (22,500 脳 PVAF @ 5%, 20) = ($22,500 脳 12.4622) = $280,400
Present value of face value (500,000 脳 PVF @5%,20) = ($500,000 脳 0.37689) = $188,445
Therefore, the issue price of bonds = ($280,400 + $188,445) =$468,845
Working notes:
Present value of face value (500,000 脳 PVF @5%,20) = ($500,000 脳 0.37689) = $188,445
Present value of interest (22,500 脳 PVAF @ 5%, 20) = ($22,500 脳 12.4622) = $280,400
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