Factors That Affect the Bond Issue Price
Rivera Enterprises is considering the issue of $119,000 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.
Face
b. Assume instead that the market rate of interest is 7%; the nominal rate is still 6%.
Discount
Without using numbers, explain your position.
The input in the box below will not be graded, but may be reviewed and considered by your instructor.
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). If required, round your intermediate and final answers to the nearest whole 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. $