Question

Maggie Enterprises issued $100,000 of 6%, five-year bonds with interest payable semiannually. Determine the issue price if the bonds are priced to yield (a) 6%, (b) 10%, and (c) 2%.

Answer 1

Answer:

a. $100,000

b. $84,556.53

c.  $118,942.61

Explanation:

Remember that if the YTM is greater than the Coupon rate, the Bonds will be trading at a discount and also if YTM is less than the Coupon rate, the Bonds will be trading at a premium.

Therefore,

Thus,

At 6% the Bonds will be trading at par

-That is at $100,000

At 10% the Bonds will trade at a discount

Thus,

FV = $100,000

Pmt = ($100,000 × 6%) ÷2 = $3,000

N = 5 × 2 = 10

i =  10%

P/yr = 2

PV = ?

The price will be $84,556.53

At 2% the Bonds will trade at a Premium

Thus,

FV = $100,000

Pmt = ($100,000 × 6%) ÷2 = $3,000

N = 5 × 2 = 10

i =  2%

P/yr = 2

PV = ?

The price will be $118,942.61