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Factors That Affect the Bond Issue Price

BENTWORTH CORP. is considering the issue of $102,000 face value, ten-year term bonds. The bonds will pay 6% interest each December 31. The current market rate is 6%; therefore, the bonds will be issued at face value.

Required:

1. For each of the following situations, indicate whether you believe the company will receive a premium on the bonds or will issue them at a discount or at face value.

a. Interest is paid semiannually instead of annually.
- Select your answer -DiscountFace valuePremiumItem 1

b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
- Select your answer -DiscountFace valuePremiumItem 2

2. For each situation in part (1), prove your statement by determining the issue price of the bonds given the changes in (a) and (b). Do not round intermediate computation and round your final answer to the nearest dollar.

Here are some time value of money factors:
Present value of an annuity, n=10, i=7%, PV=7.02358
Present value of an annuity, n=20, i=3%, PV=14.87747
Present value of a single amount, n=10, i=7%, PV=0.50835
Present value of a single amount, n=20, i=3%, PV=0.55368

Proof: Bond Price
a. $
b. $

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Irving Heathcote
Irving HeathcoteLv2
29 Sep 2019

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Related questions

2. Four coupon bonds are sold in the market with the following information:

Bond 1 Face value $1000 Coupon rate 5% Maturity 10 years

Bond 2 Face value $1000 Coupon rate 9% Maturity 10 years

Bond 3 Face value $1000 Coupon rate 7% Maturity 10 years

Bond 4 Face value $1000 Coupon rate 9% Maturity 30 years
(1) Without calculation, order the present values of the bonds from high to low under the constant interest rate of 7%. Hint: Your explanation is crucial because we require no calculation.
(2) Calculate the present value of the bonds under the constant interest rate of 7%.
(3) Now that all four bonds are sold at a same price. Is it true that people will surely buy the one with the highest present value calculated in (2)? If your answer is no, explain your reason.

On January 1, 2014, Nowell Corporation issued $303,000 in bonds that mature in ten years. The bonds have a stated interest rate of 6% and pay interest on June 30 and December 31 each year. When the bonds were sold, the market of interest was 6%. (FV of $1, PV of $1, FVA of $1,and PVA of $1: use the appropriate factors from the tables)

a) What was the issue price on January 1, 2014?

b) What amount of interest expense should be recorded on June 30, 2014 and December 31, 2014?

c) What amount of cash interest should be paid on June 30, 2014 and December 31, 2014?

d) What is the book value of the bonds on December 31, 2014 and December 31, 2015?

Suppose your company needs to raise $36 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 7 percent and a zero coupon bond. Your company’s tax rate is 30 percent. Both bonds will have a par value of $1,000.
a-1. How many of the coupon bonds would you need to issue to raise the $36 million?
Number of coupon bonds
a-2. How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Number of zero coupon bonds
b-1.

In 25 years, what will your company’s repayment be if you issue the coupon bonds? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Coupon bonds repayment $
b-2.

What if you issue the zeroes? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Zeroes repayment $

c.

Calculate the aftertax cash flows for the first year for each bond. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, i.e. 1,234,567.)

Coupon bonds (Click to select)InflowOutflow $
Zero coupon bonds (Click to select)InflowOutflow $

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