Heller Company issues $950,000 of 10% bonds that pay interest semiannually and mature in 10 years. What is the bonds’ issue pric

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2 years ago

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Heller Company issues $950,000 of 10% bonds that pay interest semiannually and mature in 10 years. What is the bonds’ issue pric

e assuming that the bonds’ market interest rate is 14% per year? Select one: A. $ 748,714 B. $ 950,000 C. $ 751,788 D. $1,273,515 E. None of the above

Business

1 answer:

barxatty [35] · Answer 1 · 2023-02-27T01:29:27+03:00

Answer:

A. $ 748,714

Explanation:

This 10-year bond with semiannual coupon payment will have 20 coupon payments plus 1 par payment at maturity. The bond price issuing price is the present value of all coupon payments as well as par value. Let formulate the bond price as below:

Bond price = [(Coupon rate/2) x (Par value)]/[1 + (Market interest rate/2)] + [(Coupon rate/2) x (Par value)]/[1 + (Market interest rate/2)]^2 + ...+ (Coupon rate/2) x (Par value) + Par value]/[1 + (Market interest rate/2)]^20

Putting all the number together, we have:

Bond price = [(10%/2) x (950,000)]/[1 + (14%/2)] + [(10%/2) x (950,000)]/[1 + (14%/2)]^2 + ...+ (10%/2) x (950,000) + 950,000]/[1 + (14%/2)]^20 = 748,714