Problem:
On January 1, 2015, Water World issues $26 million of 7% bonds, due in 10 years, with interest payable semiannually on June 30 and December 31 each year. Water World intends to use the funds to build the world's largest water avalanche and the "tornado"-a giant outdoor vortex in which riders spin in progressively smaller and faster circles until they drop through a small tunnel at the bottom.
Required:
Question 1: If the market rate is 6%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
Question 2: If the market rate is 7%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
Question 3: If the market rate is 8%, will the bonds issue at face amount, a discount, or a premium? Calculate the issue price.
Note: Please show how you came up with the solution.