Bubs Corporation is planning to issue bonds with a face value of $506,500 and a coupon...

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Bubs Corporation is planning to issue bonds with a face value of$506,500 and a coupon rate of 6 percent. The bonds mature in 15years and pay interest semiannually every June 30 and December 31.All of the bonds will be sold on January 1 of this year. (FV of $1,PV of $1, FVA of $1, and PVA of $1)
Compute the issue (sales) price on January 1 of this year foreach of the following independent cases:
Case A: Market interest rate (annual): 8.5%
Case B: Market interest rate (annual): 4%
What are the issue prices for each case?

Answer & Explanation Solved by verified expert

3.7 Ratings (509 Votes)

	A	B	C
1		Case A	Case B
2	Face value (It is the maturity amount to be repaid)	506500	506500
3	Coupon rate	6%	6%
4	Interest paid semi-annually	15195	15195
5	Number of semiannual periods	30	30
6	Market interest rate	8.5%	4%
7
8	Present value of interest paid semi-annually	$254,957	$340,314
9	Present value of maturity amount to be repaid	$145,311	$279,624
10	Issue price of the bonds	$400,268	$619,938

Above figures have been calculated in the following manner:

	Case A	Case B
Face value (It is the maturity amount to be repaid)	506500	506500
Coupon rate	0.06	0.06
Interest paid semi-annually	=B2B3(1/2)	=C2C3(1/2)
Number of semiannual periods	=15*2	=15*2
Market interest rate	0.085	0.04

Present value of interest paid semi-annually	=PV(B6/2,B5,-B4,0,0)	=PV(C6/2,C5,-C4,0,0)
Present value of maturity amount to be repaid	=PV(B6/2,B5,0,-B2,0)	=PV(C6/2,C5,0,-C2,0)
Issue price of the bonds	=B8+B9	=C8+C9

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Bubs Corporation is planning to issue bonds with a face value of$506,500 and a coupon rate of 6 percent. The bonds mature in 15years and pay interest semiannually every June 30 and December 31.All of the bonds will be sold on January 1 of this year. (FV of $1,PV of $1, FVA of $1, and PVA of $1)Compute the issue (sales) price on January 1 of this year foreach of the following independent cases:Case A: Market interest rate (annual): 8.5%Case B: Market interest rate (annual): 4%What are the issue prices for each case?