Question

Mountain Excursions issues a bond due in 10 years with a stated interest rate of 7% and a face value of $200,000. Interest payments are made semi-annually. The market rate for this type of bond is 8%. What is the issue price of the bond (rounded to nearest whole dollar)

Answer 1

Answer:

 $186,409.7  

Explanation:

The computation of the issue price of the bond is shown below:

Cash flows               Amount  PVF         Present value

Semi annual Interest   $,7000 13.59033 $95.132.31  

Maturity value     $200,000 0.456387 $91,277.4  

Price of bonds                                   $186,409.7  

The number of years is 20

And, the rate of interest is 4%

And please refer to the present value factor table

Answer 2

If the market rate for this type of bond is 8%. The issue price of the bond is $186,409.7.

Issue price of bond

Price=$200,000×PVAF[(8%÷2)^10×2] +$200,000×PVF[(8%÷2)^10×2]

Price=200,000×7%÷2×[1-(1+8%÷2)^-10×2÷8%÷2] +200,000×1÷(1+8%÷2)^10×2

Price=$7,000×[1-(1+0.04)^-20÷0.04] +$200,000×1÷(1+0.04)^20

Price=$7,000× [1-1÷(1.04)^20÷0.04]+$200,000×1÷(1.04)^20

Price=$7,000×(1-0.45638695/0.04)+$200,000×0.45638695

Price=$7,000×0.543613054/0.04+$91,277.39

Price=$95,132.28+$91,277.39

Price=$186,409.67

Price=$186,409.7 (Approximately)

Inconclusion the issue price of the bond is $186,409.7.

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