Question

On January 1, year 1, Klondike issued 10-year bonds with a stated rate of 10% and a face amount of $100,000. The bonds pay interest annually. The market rate of interest was 12%. Calculate the issue price of the bonds. Round your answer to the nearest dollar.

Answer 1

Answer:

$88,700

Explanation:

In this question, we are asked to calculate the issue price of bonds .

Firstly, we start by calculating the value of the coupon interest.

Mathematically;

Coupon interest = $100000*10% = $10000

We now calculate the issue price by having to discount all the coupon payments and the face amount using 12%.

Discounting the coupon payments, we will use the formula of present value of ordinary annuity:

Present value = Coupon payment ×(1-(1/(1+i)^n)/i

where;

coupon payment = $10000

i = Interest rate = 12%

n = no of times = 10 times ( Annual for 10 years)

Substituting this, we have:

Present value = 10,000 * (1-1/(1+0.12)^10)/0.12 = $56,502.23

The present value of face amount =. $100000/(1.12)^10 = $32197.32

Issue price of the bonds = $56502.23 + $32197.32

= $88699.55

This is $88,700 To the nearest $