Mufala Inc will issue 10000000 of 6 10year bonds The market

Mufala, Inc., will issue $10,000,000 of 6% 10-year bonds. The market rate for bonds with similar risk and maturity is 8%. Interest will be paid by Mufala semiannually. What is the issue price of the bonds? (Refer to the appropriate table in the Present and Future Value Tables section of your tex

Issue price of the bonds__________ ?

Solution

Solution:

Face value of bonds = $10,000,000

Rate of interest = 6%

Market rate of interest for similar bond (Yield) = 8%

Issue price of bond will be present value of interest and principal repayment discounted at rate of 8% i.e. current yield on bond.

Bond will pay semiannual interest for 10 years = $10,000,000*6%*6/12 = $300,000

Issue price of bond = $300,000 * cumulative PV factor for 20 periods at 4% interest + 10,00,000*PV factor at 20 period at 4% interest

= $300,000*13.5903 + 10,000,000 * 0.4564 = $8,656,546

Therefore issue price of bond will be $8,656,546