Question

On January 1, 2015, East Lansing, Inc, issues $2,000,000 of 10 percent, 5-year bonds that pay interest of $100,000 semiannually. The market rate is 8 percent at the time of issuance. The issue price of the bonds is:____a. $1,852.810 b. $1888,970 c. $1.999.970 d. $2,162.290

Answer 1

Answer:

The answer is option D

Explanation:

The bond can be issued at par, at a discount or at a premium depending on the coupon rate and the market interest. The price of the bond which pays semi annual coupon can be calculated using the formula of bond price. The formula to calculate the price of the bond is attached.

First we need to determine the semi annual coupon payment, periods and YTM.

Semi annual coupon payments = 2000000 * 0.1 * 6/12 = 100000

Semi annual periods = 5 * 2 = 10

Semi annual YTM = 0.08 * 6/12 = 0.04

Bond Price = 100000 * [(1 - (1+0.04)^-10) / 0.04]  +  2000000 / (1+0.04)^10

Bond Price = $2162217.916

The price of the bond is thus $2162290 approx. The difference in answers is due to rounding off.