Question

The following information pertains to Fox Corp.'s issuance of bonds on July 1, 20x8:
Face amount $800,000
Term 10 years
Stated interest rate 9%
Interest payment dates Annually on July 1
Yield 6%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of ordinary annuity
of 1 for 10 periods 7.360 6.418
What should be the issue price for this bond?
a. $700.
b. $807.
c. $864.
d. $1,000.

Answer 1

Answer:

It will be issued at $807 

Explanation:

The bonds will be issued at the sum of the present value of the coupon payment and maturity discounted at the market stated rate of 9%

Coupon Payment:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$  

Coupon payment face valiue x coupon rate:

$1,000 x 6% = $60

time 10  years

market stated rate 0.09

$60 \times \frac{1-(1+0.09)^{-10} }{0.09} = PV$  

PV $385.0595  

Maturity present value:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity $1,000.00  

time   10 years  

market rate  0.09

$\frac{1000}{(1 + 0.09)^{10} } = PV$  

PV   422.41  

We add both values and achieve the market value of the bonds

PV coupon  $ 385.0595  

PV maturity  $ 422.4108    

Total            $ 807.4703  

Rounding we got the right answer as $ 807