Maggie, Inc. Issued a 10 year,
Maggie, Inc. Issued a 10 year, $100,000 face bond with a 10%interest rate. The bond pays the interest for 10 years and thenpays the principal of $100,000 at the end of the 10th year. (Solve1-3)
1.) If the current interest rates are 10% at the time of theissue, on the date of the issue Maggie Inc. will receive:
a.) $100,000
b.) $91,954.77
c.) $73,734.81
d.) $88,699.55
2.) If the current interest rates are 12% at the time of issue,on the date of issue Maggie Inc. will receive:
a.) $104,986.81
b.) $113.420.16
c.) $88,699.55
d.) $100,000
3.) If the current interest rates are 8% at the time of theissue, on the date of the issue Maggie Inc. will receive:
a.) $104,986.81
b.) $113.420.16
c.) $77,399.11
d.) $100,000
Answer:
Current price of bond = coupon amount * PVIFA(maket interestrate, no. of years to maturity) + redemption/maturityvalue*PVIF(maket interest rate, no. of years to maturity)
Given information – Par value = $ 100000
Coupon rate = 10%
coupon amout per year = 100000*10% = 10000
maturity period = 10 Years
Answer to Part 1
market interest rate = 10%
current price of bond = 10000*PVIFA(10%,10) +100000*PVIF(10%,10)
= 10000*6.144567 + 100000*0.385543
= 61445.70 + 38554.3
= 100000
so the correct option will be (a). Maggie inc. should bereceived $ 100000.
Answer to Part 2
market interest rate = 12%
current price of bond = 10000*PVIFA(12%,10) +100000*PVIF(12%,10)
= 10000*5.650223 + 100000*0.321973
= 56502.23 + 32197.3
= 88699.53
so the correct option is (c), Maggie should be received $88699.55.
Answer to Part 3
market interest rate = 8%
current price of bond = 10000*PVIFA(8%,10) +100000*PVIF(8%,10)
= 10000*6.710081 + 100000*0.463193
= 67100.81 + 46319.3
= 113420.1
correct option should be (b), maggie should be received $113420.16.
Please check with your answer and let me know.