ABC Enterprises issues $400,000 of bonds paying a stated interest rate of 7%. Th
ID: 2570578 • Letter: A
Question
ABC Enterprises issues $400,000 of bonds paying a stated interest rate of 7%. The bonds are due in 10 years, with interest payable annually each year on Jan. 1st. When the bonds are issued, other bonds of similar risk and maturity are paying 11% (i.e. the discount rate or market interest rate is 11%).
Calculate the issuance (selling) price of this bond:
Present value of interest payments (annuity portion)
_______ (int. payment) * _______(factor)_ =
Present Value of Bond Principal (single sum value)
400,000 (principal) * ________(factor)_=
Total Present Value, or selling price
Is the bond issued at a premium, discount, or face value (par)?
Present value of interest payments (annuity portion)
_______ (int. payment) * _______(factor)_ =
Present Value of Bond Principal (single sum value)
400,000 (principal) * ________(factor)_=
Total Present Value, or selling price
Explanation / Answer
Calculate the issuance (selling) price of this bond:
Present value of interest payments (annuity portion)
28000 (int. payment) *5.88923(factor)_ =
164898.44
Present Value of Bond Principal (single sum value)
400,000 (principal) * 0.35218(factor)_=
140872
Total Present Value, or selling price=305770.44
Total selling price of bonds is 305770.44
Bonds issued at discount...
Present value of interest payments (annuity portion)
28000 (int. payment) *5.88923(factor)_ =
164898.44
Present Value of Bond Principal (single sum value)
400,000 (principal) * 0.35218(factor)_=
140872
Total Present Value, or selling price=305770.44