Question

On January 1, GHI Corporation issued four-year bonds with a face value of $100,000. The bonds have a stated interest rate of 4 percent. When the bonds were issued, the market interest rate was 5 percent. The bonds pay interest once per year on December 31. Determine the amount that GHI received at issuance. Your answer should be rounded to the nearest full dollar (i.e., no cent

Answer 1

Answer:

Year   Cashflow    DF@5%        PV

              $                                  $

1          4,000         0.9524      3,809.60

2         4,000         0.9070       3,628.00

3         4,000         0.8638        3,455,20

4         104,000     0.8227         85,560.80

      Market price of the bond   96,454

The amount that GHI received at issuance is $96,454.

Explanation:

In this case, we need to calculate the current market value of the bond.  The annual coupon is calculated as R = 4% x $100,000 =$4,000, which is 4% of the face value. We will discount the annual coupon and face value  of the bond at 5% market interest rate. The cashflow for year 4 is the aggregate of coupon and face value of the bond. The current market value of the bond calculated above is the amount that GHI received at issuance of the bond.