a ABC Co issues 100000 4 10 year bonds when the prevailing m

a. ABC Co. issues $100,000, 4%, 10 year bonds when the prevailing market rate of interest is 5%. The bonds pay interest annually. Compute the issue price of the bonds.

b. ABC Co. issues $100,000, 4%, 10 year bonds when the prevailing market rate of interest is 5%. The bonds pay interest semi-annually. Compute the issue price of the bonds.

c. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest annually. Compute the issue price of the bonds.

d. ABC Co. issues $500,000, 10%, 10 year bonds when the prevailing market rate of interest is 9%. The bonds pay interest semi-annually. Compute the issue price of the bonds.

Solution

Price of the bond = c × F × (1 ? (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond discount factor taken upto 5 decimal taken ans 1 Price of Bond 4000*(1-(1.05)^-10)/.05)+100000/(1.05)^10 (4000*(1-.61391)/.05)+100000*.61391 92278 Interest paid (100000*4%) $4,000 No. of period 10 Price of the bonds $92,278 ans 2 Price of Bond 2000*(1-(1.025)^-20)/.05)+100000/(1.025)^20 (2000*(1-.61027)/.025)+100000*.61027 92205 Interest paid (100000*4%*6/12) $2,000 No. of period (10*2) 20 Price of the bonds $92,205 ans 3 Price of Bond 10000*(1-(1.09)^-10)/.09)+100000/(1.09)^10 (10000*(1-.42241)/.09)+100000*.42241 106418 Interest paid (100000*10%) $10,000 No. of period 10 Price of the bonds $106,418 ans 4 Price of Bond 5000*(1-(1.045)^-20)/.045)+100000/(1.045)^10 (5000*(1-.41464)/.045)+100000*.41464 106504 Interest paid (100000*10%*6/12) $5,000 No. of period (10*2) 20 Price of the bonds $106,504