Trew Company plans to issue 900000 10year 6 percent bonds In

Trew Company plans to issue $900,000, 10-year, 6 percent bonds. Interest is payable semi-annually on June 30 and December 31. All of the bonds will be sold on January 1, 2014. Determine the issuance price of the bonds assuming a market yield of 8.0 percent.

Solution

Step 1

Calulation of present value of ipricipal = Face value of bonds * PV factor at 4 % for 20 periods

= $900,000 * .4564 = $ 410,760

Step 2

Calculation of interest amount = 900,000* 3 % =27000

Step 3

Calculation of present value of interest =  Interest amount * PV factor at 4 % for 20 periods

=27000 * 13.591 = $ 366,930

Step 4

Issue price of bond = Present value of principal + Present value of interest

= 410,760 + 366,930

= $ 777690