Ocean Adventures issues bonds due in 10 years with a stated interest rate of 6% and a face value of $500,000. Interest payments are made semi-annually. The market rate for this type of bond is 5%. What is the issue price of the bonds

To calculate the price of the bond, we need to first calculate the coupon payment per period. We assume that the interest rate provided is stated in annual terms. The bonds are semi annual so the coupon payment is per six months.

Coupon Payment = 500000 * 0.06 * 6/12 = $15000

Total periods = 10 * 2 = 20

Semi Annual market interest rate = 5% /2 = 2.5%

The formula to calculate the price of the bonds today is attached.

Bond Price = 15000 * [( 1 - (1+0.025)^-20) / 0.025] + 500000 / (1+0.025)^20

Bond Price = $538972.9057

The bonds are issued at a price of $538972.9057 rounded off to $538972.91

Tundexi Tundexi · Answer 2 · 2021-11-26T12:06:21+01:00

The issue price of the bond is $538,972.91.

Here, we are going to use the Present value function of the MS Excel to derive the Issue price of the bond.

The Issue price of the bond is the present value of future cash flows.

Face value = -500,000

Coupon rate = 6%

Period = 20 (10*2)

Interest = 5%/2

PMT = 15,000(500,000 * 6%/2)

Issue Price of the bond = -PV(Rate, Nper, Pmt, Fv)

Issue Price of the bond = -pv(5%/2, 20, 15000, -500,000)

Issue Price of the bond = $538972.9057

Issue Price of the bond = $538,972.91

In conclusion, the issue price of the bond is $538,972.91.

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