On January 1, 2021, Frontier World issues $40.6 million of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. Required: 1-a. If the market rate is 7%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

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Business

Joan

19 January, 00:46

On January 1, 2021, Frontier World issues $40.6 million of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The proceeds will be used to build a new ride that combines a roller coaster, a water ride, a dark tunnel, and the great smell of outdoor barbeque, all in one ride. Required: 1-a. If the market rate is 7%, calculate the issue price. (FV of $1, PV of $1, FVA of $1, and PVA of $1)

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Williamson · Answer 1

The issue price of the bond is $44,330,000

Explanation:

The issue price of the bond can be computed using the pv formula in excel, which is given as = -pv (rate, nper, pmt, fv)

rate is the semi-annual yield to maturity on the bond which is 7%/2=3.5%

nper is the number of coupon payments the bond would make before maturity, which 15 years multiplied by 2=30

pmt is the semi-annual interest payment of the bond i. e 8%/2*$40.6 million=$1.624 million

The fv is the face value of the bond repayable at maturity which is $40.6 million

=-pv (3.5%,30,1.624,40.6)

pv=$44.33 million