8-8 - 10 EQs (A) - 90%

Question 1

What is the issue price of a bond?

Answer 1

PV of maturity value + PV of interest annuity

PV must be computed using the yield rate

Ex.

10 year bond
face amt $1M
stated interest 8%
priced to yield 10%

PV of 1 for 10 periods
at 8% 0.463
at 10% 0.386

PV of ordinary annuity of 1 for 10 periods
at 8% 6.710
at 10% 6.145

$1M x 3.86 = 386,000
$80k x 6.145 = 491,600

Total issue price = $877,600