Question

BE14-1 (L01) Whiteside Corporation issues $500,000 of 9% bonds, due in 10 years, with interest payable semi-annually. At the time of issue, the market rate for such bonds is 10%. Compute the issue price of the bonds.

Short answer

The issue price of the bonds is$468,845.

Step-by-step solution

Meaning of Issue Price

The issue price of a bond is based on the relationship between the interest rate that the bonds pay and themarket interest ratebeing paid on the same date. The issue price of the bond is the price at which the bond issuer originally sells the bonds.

Calculation of the issue price of the bonds

Semi-annual interest (500,000 × 9% × 6/12) = $22,500

Period (10 years × 2) = 20 periods

Semi-annual yield = (10% × 0.5) = 0.05

Present value of interest (22,500 × PVAF @ 5%, 20) = ($22,500 × 12.4622) = $280,400

Present value of face value (500,000 × PVF @5%,20) = ($500,000 × 0.37689) = $188,445

Therefore, the issue price of bonds = ($280,400 + $188,445) =$468,845

Working notes:

Present value of face value (500,000 × PVF @5%,20) = ($500,000 × 0.37689) = $188,445

Present value of interest (22,500 × PVAF @ 5%, 20) = ($22,500 × 12.4622) = $280,400