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

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